Widening the Range of Underlyings for Derivatives Pricing with QUAD by Using Finite Difference to Calculate Transition Densities—Demonstrated for the No-Arbitrage SABR Model

Haozhe Su, David Newton

Research output: Contribution to journalArticle

Abstract

The QUAD method is a fast, flexible numerical pricing technique, widely appli-cable to many option types in its QUAD I and QUAD II versions where the underlying process has a closed-form density function or characteristic func-tion. In its most advanced version, QUAD III, sac-rificing only a little speed, it retains all the flexibility and applicability of earlier versions while covering an even greater range of underlying processes through use of approximations of the density functions. Here, we show how cases without suitable approximations can be handled by using finite difference methods for (only) that part of the calculation. We illustrate with the no arbitrage SABR model for the underlying.
Original languageEnglish
Article numberjod.2020.1.105
JournalJournal of Derivatives
Volume2020 (Winter)
Early online date23 Apr 2020
DOIs
Publication statusPublished - 2020

Keywords

  • Derivatives, options, QUAD

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