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- Title
Analytical Valuation of Turbo Warrants under Double Exponential Jump Diffusion.
- Authors
Hoi Ying Wong; Ka Yung Lau
- Abstract
Turbo warrants have experienced huge growth since they first appeared 2005. In some European markets, buying and selling turbo warrants constitutes 50% of all derivative trading nowadays. In Asia, the Hong Kong Exchange and Clearing Limited (7-IKEx) introduced the callable bull/bear contracts, which are essentially turbo warrants, to the market in 2006. Turbo warrants are special types of barrier options in which the rebate is calculated as another exotic option. Under the Black-Scholes dynamics, Eriksson [2005] has derived the closed form solution for turbo war- rants and shows that it is less sensitive to the change in volatility when compared to vanilla options. Wong and Chan [forthcoming] study the pricing under several stochastic volatility models and point out that turbo warrants can be very sensitive to the change in the shape of the volatility surface. As another possible factor contributing to the volatility surface is the jump in asset price, we obtain analytical solutions for turbo warrants under the double exponential jump diffusion model in terms of Laplace transforms in this article. Our simulation verifies that the analytical solution is accurate and very efficient. The computational time is less than one second. ~4/e then examine the impact of jumps on Turbo warrants.
- Subjects
ASIA; HONG Kong Exchanges &; Clearing Ltd.; MARKET volatility; EXOTIC options (Finance); REACTION-diffusion equations; VALUATION; FINANCIAL markets
- Publication
Journal of Derivatives, 2008, Vol 15, Issue 4, p61
- ISSN
1074-1240
- Publication type
Article
- DOI
10.3905/jod.2008.707211