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Saddlepoint Approximations to Option Prices
L. C. G. Rogers and O. Zane
The Annals of Applied Probability
Vol. 9, No. 2 (May, 1999), pp. 493-503
Published by: Institute of Mathematical Statistics
Stable URL: http://www.jstor.org/stable/2667342
Page Count: 11
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The use of saddlepoint approximations in statistics is a well-established technique for computing the distribution of a random variable whose moment generating function is known. In this paper, we apply the methodology to computing the prices of various European-style options, whose returns processes are not the Brownian motion with drift assumed in the Black-Scholes paradigm. Through a number of examples, we show that the methodology is generally accurate and fast.
The Annals of Applied Probability © 1999 Institute of Mathematical Statistics