Fast American Option Pricing using Nonlinear Stencils

• DOI: 10.48550/arxiv.2303.02317
• Publication Date: 2024-02-20
• Authors: Zafar Ahmad; Reilly Browne; Rezaul Chowdhury; Rathish Das; Yushen Huang; Yimin Zhu
• Keywords: Computational Engineering, Finance, and Science (cs.CE); FOS: Computer and information sciences; FOS: Economics and business; Quantitative Finance - Computational Finance; Computer Science - Data Structures and Algorithms; Data Structures and Algorithms (cs.DS); Computational Finance (q-fin.CP); 0101 mathematics; Computer Science - Computational Engineering, Finance, and Science; 01 natural sciences

We study the binomial, trinomial, and Black-Scholes-Merton models of option pricing. We present fast parallel discrete-time finite-difference algorithms for American call option pricing under the binomial and trinomial models and American put option pricing under the Black-Scholes-Merton model. For $T$-step finite differences, each algorithm runs in $O(\left(T\log^2{T}\right)/p + T)$ time under a greedy scheduler on $p$ processing cores, which is a significant improvement over the $Θ({T^2}/{p}) + Ω(T\log{T})$ time taken by the corresponding state-of-the-art parallel algorithm. Even when run on a single core, the $O(T\log^2{T})$ time taken by our algorithms is asymptotically much smaller than the $Θ(T^2)$ running time of the fastest known serial algorithms. Implementations of our algorithms significantly outperform the fastest implementations of existing algorithms in practice, e.g., when run for $T \approx 1000$ steps on a 48-core machine, our algorithm for the binomial model runs at least $15\times$ faster than the fastest existing parallel program for the same model with the speed-up factor gradually reaching beyond $500\times$ for $T \approx 0.5 \times 10^6$. It saves more than 80\% energy when $T \approx 4000$, and more than 99\% energy for $T > 60,000$. Our option pricing algorithms can be viewed as solving a class of nonlinear 1D stencil (i.e., finite-difference) computation problems efficiently using the Fast Fourier Transform (FFT). To our knowledge, ours are the first algorithms to handle such stencils in $o(T^2)$ time. These contributions are of independent interest as stencil computations have a wide range of applications beyond quantitative finance.