Fast exponential time integration scheme for option pricing with jumps

Abstract

SUMMARYA fast exponential time integration scheme is considered for pricing European and double barrier options in jump‐diffusion models. After spatial discretization, the option pricing problem is transformed into the product of a matrix exponential and a vector, while the matrix bears a Toeplitz structure. The shift‐and‐invert Arnoldi method is then employed for fast approximation to such operation. Owing to the Toeplitz structure, the computational cost can be reduced by the fast Fourier transform. Furthermore, the discretized form of option pricing problem satisfies a given condition such that the error bound of the shift‐and‐invert Arnoldi approximation is unrelated to the norm of the matrix. Numerical tests are carried out to compare the proposed method with other option pricing methods. Copyright © 2010 John Wiley & Sons, Ltd.