Patent ID: 7536327

Claim:
A method for valuation of financial options by a data processor, wherein a value of an option is computed by a determination of an expectation by the data processor, the method comprising: receiving in the data processor a plurality of input parameters specifying the option; constructing with the data processor a multivariate integrand representing option payoffs as a mathematical function of the input parameters; determining with the data processor a multivariate integration domain representing the region where the option payoffs are nonzero by computing discontinuities of the multivariate integrand; constructing by a sparse grid quadrature method with the data processor a plurality of integration points inside the multivariate integration domain and a plurality of integration weights; determining with the data processor a plurality of integrand values each representing an option payoff by evaluating the multivariate integrand at each of the integration points; determining with the data processor an expected value of all option payoffs by the summation of the integrand values multiplied by the corresponding integration weights; determining with the data processor the value of the option by discounting the expected value; and outputting the value of the option to a display in combination with the data processor.