Fast Barrier Option Pricing by the COS BEM Method in Heston Model

In this work, the Fourier-cosine series (COS) method has been combined with the Boundary Element Method (BEM) for a fast evaluation of barrier option prices. After a description of its use in the Black and Scholes (BS) model, the focus of the paper is on the application of the proposed methodology t...

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Bibliographic Details
Published in:arXiv.org 2023-01
Main Authors: Aimi, A, Guardasoni, C, Ortiz-Gracia, L, Sanfelici, S
Format: Article
Language:English
Subjects:
Boundary element method
Characteristic functions
Cosine series
Error analysis
Fourier series
Series expansion
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Summary:In this work, the Fourier-cosine series (COS) method has been combined with the Boundary Element Method (BEM) for a fast evaluation of barrier option prices. After a description of its use in the Black and Scholes (BS) model, the focus of the paper is on the application of the proposed methodology to the barrier option evaluation in the Heston model, where its contribution is fundamental to improve computational efficiency and to make BEM appealing among Finance practitioners as a valid alternative to Monte Carlo (MC) or other more traditional approaches. An error analysis is provided on the number of terms used in the Fourier-cosine series expansion, where the error bound estimation is based on the characteristic function of the log-asset price process.
ISSN:2331-8422