Journal of Computational Finance

Risk.net

Applications of periodic and quasiperiodic decompositions to options pricing

Dominique Bang

ABSTRACT

We present a new formulation of the European call payoff as a convergent trigonometric series, where the corresponding frequencies are selected according to a minimum variance algorithm. When the characteristic function of the logmoneyness is available, this provides an efficient alternative with which to transform methods for option valuation (such as the Fourier integral), reducing the frequency spectrum from a continuum to a discrete set.