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Using laplace transform to price American puts

Journal Article


Abstract


  • This paper presents an efficient numerical approach, based on the Laplace

    transform, for pricing American puts. After the appropriate expressions of the optimal

    exercise price as well as the option price are found in the Laplace space based on the pseudosteady-

    state approximation (see [26]), numerical inversions are performed to restore their

    corresponding values in the original time space. Among many numerical inversion techniques,

    we have found that three are most suitable for the functions arising from option

    pricing problems. Then, out of these three methods, we have also found that, through numerical

    experiments, the Stehfest method is the best, in terms of both numerical accuracy

    and computation efficiency. A great advantage of this numerical approach is its robustness

    of calculating the Greeks of an option.

Publication Date


  • 2012

Citation


  • Zhu, S. & Zhang, J. (2012). Using laplace transform to price American puts. Dynamics of Continuous, Discrete and Impulsive Systems Series B: Applications and Algorithms, 19 (4-5), 447-469.

Scopus Eid


  • 2-s2.0-84865170074

Ro Metadata Url


  • http://ro.uow.edu.au/infopapers/2116

Has Global Citation Frequency


Number Of Pages


  • 22

Start Page


  • 447

End Page


  • 469

Volume


  • 19

Issue


  • 4-5

Place Of Publication


  • Canada

Abstract


  • This paper presents an efficient numerical approach, based on the Laplace

    transform, for pricing American puts. After the appropriate expressions of the optimal

    exercise price as well as the option price are found in the Laplace space based on the pseudosteady-

    state approximation (see [26]), numerical inversions are performed to restore their

    corresponding values in the original time space. Among many numerical inversion techniques,

    we have found that three are most suitable for the functions arising from option

    pricing problems. Then, out of these three methods, we have also found that, through numerical

    experiments, the Stehfest method is the best, in terms of both numerical accuracy

    and computation efficiency. A great advantage of this numerical approach is its robustness

    of calculating the Greeks of an option.

Publication Date


  • 2012

Citation


  • Zhu, S. & Zhang, J. (2012). Using laplace transform to price American puts. Dynamics of Continuous, Discrete and Impulsive Systems Series B: Applications and Algorithms, 19 (4-5), 447-469.

Scopus Eid


  • 2-s2.0-84865170074

Ro Metadata Url


  • http://ro.uow.edu.au/infopapers/2116

Has Global Citation Frequency


Number Of Pages


  • 22

Start Page


  • 447

End Page


  • 469

Volume


  • 19

Issue


  • 4-5

Place Of Publication


  • Canada