Quantum Algorithm for Local-Volatility Option Pricing via the Kolmogorov Equation
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arXiv
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| Main Authors: | , , , , |
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| Format: | Preprint |
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2025
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| _version_ | 1866917067360305152 |
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| author | Guseynov, Nikita Sanz, Mikel Rodríguez-Rozas, Ángel Liu, Nana Gonzalez-Conde, Javier |
| author_facet | Guseynov, Nikita Sanz, Mikel Rodríguez-Rozas, Ángel Liu, Nana Gonzalez-Conde, Javier |
| contents | The solution of option-pricing problems may turn out to be computationally demanding due to non-linear and path-dependent payoffs, the high dimensionality arising from multiple underlying assets, and sophisticated models of price dynamics. In this context, quantum computing has been proposed as a means to address these challenges efficiently. Prevailing approaches either simulate the stochastic differential equations governing the forward dynamics of underlying asset prices or directly solve the backward pricing partial differential equation. Here, we present an end-to-end quantum algorithmic framework that solves the Kolmogorov forward (Fokker-Planck) partial differential equation for local-volatility models by mapping it to a Hamiltonian-simulation problem via the Schrödingerisation technique. The algorithm specifies how to prepare the initial quantum state, perform Hamiltonian simulation, and how to efficiently recover the option price via a swap test. In particular, the efficiency of the final solution recovery is an important advantage of solving the forward versus the backward partial differential equation. Thus, our end-to-end framework offers a potential route toward quantum advantage for challenging option-pricing tasks. In particular, we obtain a polynomial advantage in grid size for the discretization of a single dimension. Nevertheless, the true power of our methodology lies in pricing high-dimensional systems, such as baskets of options, because the quantum framework admits an exponential speedup with respect to dimension, overcoming the classical curse of dimensionality. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2511_04942 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Quantum Algorithm for Local-Volatility Option Pricing via the Kolmogorov Equation Guseynov, Nikita Sanz, Mikel Rodríguez-Rozas, Ángel Liu, Nana Gonzalez-Conde, Javier Quantum Physics 68Q12 F.2.1 The solution of option-pricing problems may turn out to be computationally demanding due to non-linear and path-dependent payoffs, the high dimensionality arising from multiple underlying assets, and sophisticated models of price dynamics. In this context, quantum computing has been proposed as a means to address these challenges efficiently. Prevailing approaches either simulate the stochastic differential equations governing the forward dynamics of underlying asset prices or directly solve the backward pricing partial differential equation. Here, we present an end-to-end quantum algorithmic framework that solves the Kolmogorov forward (Fokker-Planck) partial differential equation for local-volatility models by mapping it to a Hamiltonian-simulation problem via the Schrödingerisation technique. The algorithm specifies how to prepare the initial quantum state, perform Hamiltonian simulation, and how to efficiently recover the option price via a swap test. In particular, the efficiency of the final solution recovery is an important advantage of solving the forward versus the backward partial differential equation. Thus, our end-to-end framework offers a potential route toward quantum advantage for challenging option-pricing tasks. In particular, we obtain a polynomial advantage in grid size for the discretization of a single dimension. Nevertheless, the true power of our methodology lies in pricing high-dimensional systems, such as baskets of options, because the quantum framework admits an exponential speedup with respect to dimension, overcoming the classical curse of dimensionality. |
| title | Quantum Algorithm for Local-Volatility Option Pricing via the Kolmogorov Equation |
| topic | Quantum Physics 68Q12 F.2.1 |
| url | https://arxiv.org/abs/2511.04942 |