Journal of Computational Finance
ISSN:
1460-1559 (print)
1755-2850 (online)
Editor-in-chief: Christoph Reisinger
Simulation of Lévy processes and option pricing
El Hadj Aly Dia
Abstract
ABSTRACT
We approximate an infinite-activity Lévy process by either truncating its small jumps or replacing them by a Brownian motion with the same variance. Then we derive the errors resulting from these approximations for some exotic options (Asian, barrier, lookback and American). We also propose a simple method to evaluate these options using the approximated Lévy process.
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