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A Fourier-Based Valuation Method for Bermudan and Barrier Options under Heston's Model

2011; Society for Industrial and Applied Mathematics; Volume: 2; Issue: 1 Linguagem: Inglês

10.1137/100794158

1945-497X

Fang Fang, Cornelis W. Oosterlee,

Insurance, Mortality, Demography, Risk Management

We develop an efficient Fourier-based numerical method for pricing Bermudan and discretely monitored barrier options under the Heston stochastic volatility model. The two-dimensional pricing problem is dealt with by a combination of a Fourier cosine series expansion, as in [F. Fang and C. W. Oosterlee, SIAM J. Sci. Comput., 31 (2008), pp. 826–848, F. Fang and C. W. Oosterlee, Numer. Math., 114 (2009), pp. 27–62], and high-order quadrature rules in the other dimension. Error analysis and experiments confirm a fast error convergence.