Abstract

Through this paper, we introduce Fourier transform as an alternative approach to pricing option when the underlying asset follows Stochastic Volatility double Jump model (SVJJ). In fact the weakness of the traditional approaches does not depend on closed formula of probability density function which is explicitly unknown under this model. The advantage of Fourier transform technique is that for a wide class of stock price the only thing necessary to evaluate European call is a so called characteristic function since there is one-to-one relation-ship between a p.d.f & ch.f and both of which uniquely determine a probability distribution. For accuracy and validation we implement pricing formulas FFT, Monte Carlo simulation and we compare both of them to the benchmark model BS.

Citation details of the article

Journal: International Journal of Applied Mathematics
Journal ISSN (Print): ISSN 1311-1728
Journal ISSN (Electronic): ISSN 1314-8060
Volume: 30
Issue: 2
Year: 2017

DOI: 10.12732/ijam.v30i2.2

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