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تسجيل مستخدم جديدPrecise option pricing by the COS method -- How to choose the truncation interval
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The Fourier cosine expansion (COS) method is used for pricing European options numerically very fast. To apply the COS method, a truncation interval for the density of the log-returns need to be provided. Using Markovs inequality, we derive a new formula to obtain the truncation interval and prove that the interval is large enough to ensure convergence of the COS method within a predefined error tolerance. We also show by several examples that the classical approach to determine the truncation interval by cumulants may lead to serious mispricing. Usually, the computational time of the COS method is of similar magnitude in both cases.
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