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Fast Fourier Transform Model for Pricing Lookback Option

Cheng Wang, Hailei Zou

Abstract


First, Fourier transform of the price of Lookback option under Black-Scholes model is given. Then using Fourier inverse transform, Lookback options with different strikes are priced by Fast Fourier Transform(FFT) algorithm in one matlab programme. Not only is FFT more efficient than Monte Carlo algorithm and the usual approximate computation of integral, but with FFT, speculators can quickly grasp the variation of option prices with respect to different strikes. This can lead to more sensible investment schemes.

Keywords


Lookback option; characteristic function; fourier transformation; fast fourier transformation

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