Derivative Pricing – Semi-Analytic Lattice Integrator Approaches

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The aim of the pages set out below is to summarise an approach to derivative pricing that involves approximating the payout function of the derivative by a sum of a set of domain-limited functions (i.e. functions that only take non-zero values for some specific range of inputs). The functions are chosen so that the price of each element of the overall payout function can be calculated analytically. The overall price of the derivative can then be calculated in a quasi-analytic manner, merely by adding together the value contributions arising from each individual function. This can considerably speed up calculation times and can reduce the numerical noise otherwise often introduced into hedging parameter computations.




1.       Introduction

2.       Carrying out the required integrations




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