On the Application of Shannon Wavelet Inverse Fourier Techniques
An Extension to Asian Option Valuation and European Option Pricing under the SABR Model
E.I. Wagner (TU Delft - Electrical Engineering, Mathematics and Computer Science)
C.W. Oosterlee – Mentor
A.J. Ortiz Garcia – Mentor
Pasquale Cirillo – Graduation committee member
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Abstract
This work is on the extension of the SWIFT method to option pricing problems where the sum of lognormals occurs. The SWIFT method (ShannonWavelet Inverse Fourier Technique) is extended to the valuation of geometric Asian options and arithmetic Asian options with a Lévy process as underlying price process and the valuation of European options under SABR dynamics. In both applications a sum of lognormals (or sum of increments) occurs. The main result in this thesis is the SWIFT-SIA method (SWIFT sinc integral approximation), which is applied to the valuation of arithmetic Asian options as well as to the valuation of European options under the SABRmodel. Within the SWIFT-SIA method the recovery of the probability density function is obtained by an approximation, instead of a numerical integration method, which results in a very fast method compared to an alternative method based on cosine expansions as well as high accuracy in the option values.