Universal option valuation using quadrature methods |
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| Affiliation: | 1. School of Information Engineering, Shandong Youth University of Political Science, Jinan 250103, China;2. Key Laboratory of Information Security and Intelligent Control in Universities of Shandong, Jinan 250103, China;3. Department of Statistics, Allama Iqbal Open University, Islamabad 44000, Pakistan;1. School of Engineering, Azad University of Mashhad, Iran;2. Cyber Science Lab, School of Computer Science, University of Guelph, Ontario, Canada;3. School of Computer Science, University of Salford, UK;4. Department of Software Engineering and Game Development, Kennesaw State University, GA, USA;5. School of Engineering, University of Guelph, Guelph, Canada |
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| Abstract: | This paper proposes and develops a novel, simple, widely applicable numerical approach for option pricing based on quadrature methods. Though in some ways similar to lattice or finite-difference schemes, it possesses exceptional accuracy and speed. Discretely monitored options are valued with only one timestep between observations, and nodes can be perfectly placed in relation to discontinuities. Convergence is improved greatly; in the extrapolated scheme, a doubling of points can reduce error by a factor of 256. Complex problems (e.g., fixed-strike lookback discrete barrier options) can be evaluated accurately and orders of magnitude faster than by existing methods. |
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