Accurate evaluation of European and American options under the CGMY process

A finite-difference method for integro-differential equations arising from Levy driven asset processes in finance is discussed. The equations are discretized in space by the collocation method and in time by an explicit backward differentiation formula. The discretization is shown to be second-order accurate for a relevant parameter range determining the degree of the singularity in the Levy measure. The singularity is dealt with by means of an integration by parts technique. An application of the fast Fourier transform gives the overall amount of work O(NtN logN), rendering the method fast.