City Research Online

Abstract

The Fourier transform is an important tool in Financial Economics. It delivers real time pricing while allowing for a realistic structure of asset returns, taking into account excess kurtosis and stochastic volatility. Fourier transform is also rather abstract and therefore o§-putting to many practitioners. The purpose of this paper is to explain the working of the fast Fourier transform in the familiar bi nomial option pricing model. We argue that a good understanding of FFT requires no more than some high school mathematics and familiarity with roulette, bicycle wheel, or a similar circular object divided into equally sized segments. The returns to such a small intellectual investment are overwhelming.

Publication Type:	Article
Additional Information:	© 2017 Institutional Investor LLC. All Rights Reserved
Publisher Keywords:	Fast Fourier transform, option pricing, binomial lattice, chirpz transform, GAUSS, MATLAB
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance

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