16:642:612-02 Selected Topics in Applied Mathematics – Computational Finance (Spring 2007)

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           Prof. Paul M. N. Feehan course 16:642:621

Notation:
   QMDF - Domingo Tavella, Quantitative Methods in Derivatives Pricing: An Introduction to Computational Finance, Wiley 2002, ISBN 0471394475.
   IDM  - L. Clewlow and C. Strickland, Implementing Derivative Models, Wiley, 1998
   MDC - J. London, Modeling Derivatives in C++, Wiley, 2004 

1. Implement Carr-Madan fft method in Matlab using matlab fft function.

2. Derive an expression for characteristic function of the Black-Scholes model. Using your code from #1 and this CF find a price of European call and put options with S=100, K=100, T=1yr, r=0.05, q=0.02, \sigma=0.2.

3. In Matlab create a plot of the difference between European call option price obtained with FFT and the analytical solution obtained with blsprice function, as a function of M = S/K - moneyness. Same for European put option.