Fourier-cosine method for pricing forward starting options with stochastic volatility and jumps

ABSTRACTThis article provides an efficient method for pricing forward starting options under stochastic volatility model with double exponential jumps. The forward characteristic function of the log asset price is derived and thereby forward starting options are well evaluated by Fourier-cosine technique. Based on adaptive simulated annealing algorithm, the model is calibrated to obtain the estimated parameters. Numerical results show that the pricing method is accurate and fast. Double exponential jumps have pronounced impacts on long-term forward starting options prices. Stochastic volatility model with double exponential jumps fits forward implied volatility smile pretty well in contrast to stochastic volatility model.