Pricing early-exercise and discrete barrier options by fourier-cosine series expansions

We present a pricing method based on Fourier-cosine expansions for early-exercise and discretely-monitored barrier options. The method works well for exponential Lévy asset price models. The error convergence is exponential for processes characterized by very smooth () transitional probability density functions. The computational complexity is O((M ? 1)N log N) with N a (small) number of terms from the series expansion, and M, the number of early-exercise/monitoring dates. This paper is the follow-up of (Fang and Oosterlee in SIAM J Sci Comput 31(2):826–848, 2008) in which we presented the impressive performance of the Fourier-cosine series method for European options.Delft Institute of Applied MathematicsElectrical Engineering, Mathematics and Computer Scienc