Mathematical Finance Seminar

November 8, 2001 , 5:30 PM to 7:00 PM

Roger Lee, Stanford University and Courant Institute-NYU

Option Prices at Extreme Strikes, and Error Bounds for DFT Computations

Upper bounds on option prices at extreme strikes imply bounds on the tail growth of the implied volatility skew. They also lead to explicit error bounds and implementation recipes for pricing, via discrete Fourier transform, a wide class of options on any underlying state variable whose characteristic function is known.