Technical Report 2006-037

Multi-Dimensional Option Pricing using Radial Basis Functions and the Generalized Fourier Transform

Elisabeth Larsson, Krister Åhlander, and Andreas Hall

August 2006

We show that the generalized Fourier transform can be used for reducing the computational cost and memory requirements of radial basis function methods for multi-dimensional option pricing. We derive a general algorithm, including a transformation of the Black-Scholes equation into the heat equation, that can be used in any number of dimensions. Numerical experiments in two and three dimensions show that the gain is substantial even for small problem sizes. Furthermore, the gain increases with the number of dimensions.

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