Abstract:Computational methods for pricing exotic options when the underlying is driven by a Lévy process are prone to numerical inaccuracy when the driving price process has infinite activity. Such inaccuracies are particularly severe for pricing of American options. In this chapter, we examine the impact of utilizing a diffusion approximation to the contribution of the small jumps in the infinite activity process. We compare the use of deterministic and stochastic (Monte Carlo) methods, and focus on designing strateg… Show more
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