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Volume 10/Number 4, Summer 2007 Research Papers Optimal Fourier inversion in semi-analytical option pricing Roger Lord
Financial Engineering, Rabobank International, Thames Court, 1 Queenhithe, London EC4V 3RL, UK; email: roger.lord@rabobank.com Christian Kahl
Quantitative Analytics Group, Credit, Hybrid, Inflation and Commodity Derivative Analytics, ABN AMRO, 250 Bishopsgate, London EC2M 4AA, UK; email: christian.kahl@uk.abnamro.com Fourier inversion is the computational method of choice for a fast and accurate calculation of plain vanilla option prices in models with an analytically available characteristic function. Shifting the contour of integration along the complex plane allows for different representations of the inverse Fourier integral. In this article, we present the optimal contour of the Fourier integral, taking into account numerical issues such as cancellation and explosion of the characteristic function. This allows for robust and fast option pricing for virtually all levels of strikes and maturities.
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