SWIFT Valuation of Discretely Monitored Arithmetic Asian Options
Journal of Computational Science 28: 120-139, 2018
29 Pages Posted: 28 Feb 2018 Last revised: 28 Oct 2018
Date Written: June 15, 2018
Abstract
In this work, we propose an efficient and robust valuation of discretely monitored arithmetic Asian options based on Shannon wavelets. We employ the so-called SWIFT method, a Fourier inversion numerical technique with several important advantages with respect to the existing related methods. Particularly interesting is that SWIFT provides mechanisms to determine all the free-parameters in the method, based on a prescribed precision in the density approximation. The method is applied to two general classes of dynamics: exponential Lévy models and square-root diffusions. Through the numerical experiments, we show that SWIFT outperforms state-of-the-art methods in terms of accuracy and robustness, and shows an impressive speed in execution time.
Keywords: Arithmetic Asian options, Fourier transform, Shannon wavelets, SWIFT method, Exponential Lévy processes, Square-root diffusions, Option pricing
JEL Classification: C02, C60, C13
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