Derivative Pricing – Semi-Analytic
Lattice Integrator Approaches
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Abstract
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.
Contents
1. Introduction
2. Carrying
out the required integrations
References
NAVIGATION LINKS
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