Hi Alligator,I can imagine how the caching can be faster than the Surkov / Lord method for Euro options for several strikes; however, it does not seem that this will be better for Bermudan or Barrier styled claims. Any comments?

<t>I can't imagine that the integration would be faster than FFT for path-dependent options - take Bermudan e.g.Here's why I think so... suppose you had a Bermudan with two future exercise dates (S and T) and you are valuing it now. To value the option at the start date, you would need to value obta...

I just came across some similar work on using FFT for path-dependent options by these guys at U of T... http://www.cs.toronto.edu/~vsurkov/index.html

Rez, You are correct... my mistake. Thanks for the Bates reference, I also found this paper in Quantitative Finance which uses a Fourier-Laplace transform to compute the joint distribution.best,Mayaro

Thanks Alan,This is along the lines that I thought the calculation would go, but I was being lazy and was hoping that someone already had this written down somewhere. I guess I'll have to roll up my sleaves and get dirty...cheers,mayaro

<t>Thanks again Rez,Actually I am some what familar with that paper and in particular the coupled pair of ODE's that arise out of the Heston model for alpha and beta (on pg. 10 in DPS). But once again this is referring to the characteristic function of solely the observable X(t) = ln ( S(t)/S(0) ) a...

<t>Thanks Rez. I scanned through Bakshi's papers listed on his website, but did not find what I was looking for. Perhaps I should clarify a bit. The Heston model is defined by the pair S_t, sigma_t and evolve according to the SDE (in the risk-neutral measure):d ln(S_t) = ( r - 0.5 sigma_t^2 ) dt + s...

<t>In Heston's paper he derives the Fourier transform (FT) of the marginal p.d.f. for ln( S(T)/S(t) ) in terms of the model parameters and the initial volatility. I was wondering whether anyone knows how to compute the joint p.d.f of ln( S(T)/S(t) ) and sigma(T) ? If the correlation coefficient (rho...

<t>M.J.: I carried out a few experiments of my own, and I've attached a few jpg's showing how the P&L is affected by misspecified hedge parameters. In all cases I used a call option with spot and strike = $100, risk-free-rate of 5%, a hedging vol of 20%, and time to maturity of 250 days with reb...

Hm.. seems that my upload didn't work. Let's try this again...-mayaro

<t>I carried out a few experiments on exactly this question. I've attached a few jpg's showing how the P&L is affected by misspecified hedge parameters. In all cases I used a call option with spot and strike = $100, risk-free-rate of 5%, a hedging vol of 20%, and time to maturity of 250 days wit...

<t>Thanks M.J., That answers the variance question, but I suspect that the disitrbution should also be skewed - do you have a parametric form for this as well? I am assuming that your results were based on simulations - or is there an analytical closed form for the finite hedging case in addition to...

<t>So far the discussion involves the case where the assumed vol for discrete hedging and realized vol were the same. Does anyone know how the shape of the P&L is affected when the hedging vol does not match the realized vol? I suspect that the P&L should become skewned with positve skew if ...