Carr–Madan formula

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In financial mathematics, the Carr–Madan formula of Peter Carr and Dilip B. Madan[1] shows that the analytical solution of the European option price can be obtained once the explicit form of the characteristic function of , where is the price of the underlying asset at time , is available.[2] This analytical solution is in the form of the Fourier transform, which then allows for the fast Fourier transform to be employed to numerically compute option values and Greeks in an efficient manner.

References

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  1. ^ "Dilip B. Madan | Maryland Smith". www.rhsmith.umd.edu. Retrieved 2023-07-30.
  2. ^ Carr, Peter; Madan, Dilip B. (1999). "Option valuation using the fast Fourier transform". Journal of Computational Finance. 2 (4): 61–73. CiteSeerX 10.1.1.348.4044. doi:10.21314/JCF.1999.043.

Further reading

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