Optimal contours and controls in semi-analytical option pricing revisited

For models with analytically available characteristic functions, Fourier inversion is an important computational method for a fast and accurate calculation of plain vanilla option prices. To improve the numerical stability of... [ view full abstract ]

For models with analytically available characteristic functions, Fourier inversion is an important computational method for a fast and accurate calculation of plain vanilla option prices. To improve the numerical stability of the inversion, Lord and Kahl [2007] suggested a method to find an optimal contour of integration. Joshi and Yang [2011] built on Andersen and Andreasen’s [2002] suggestion, and used the Black-Scholes formula as a control variate.

At the 9^th World Congress we showed some initial results on the effectiveness of combining controls and contours. In this paper we extend this work by considering other quadratures, payoffs and controls.