medium · Quantitative Finance derivatives
In the Heston characteristic function approach, why is Fourier inversion preferred over standard Monte Carlo for pricing vanilla European options?
- It automatically satisfies the Feller condition without parameter constraints.
- Monte Carlo cannot handle the correlation ρ between asset and volatility.
- Fourier inversion provides an exact solution for American-style early exercise.
- It is computationally much faster and provides higher precision.
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