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- Title
FOURIER TRANSFORM METHODS FOR REGIME-SWITCHING JUMP-DIFFUSIONS AND THE PRICING OF FORWARD STARTING OPTIONS.
- Authors
RAMPONI, ALESSANDRO
- Abstract
In this paper we consider a jump-diffusion dynamic whose parameters are driven by a continuous time and stationary Markov Chain on a finite state space as a model for the underlying of European contingent claims. For this class of processes we firstly outline the Fourier transform method both in log-price and log-strike to efficiently calculate the value of various types of options and as a concrete example of application, we present some numerical results within a two-state regime switching version of the Merton jump-diffusion model. Then we develop a closed-form solution to the problem of pricing a Forward Starting Option and use this result to approximate the value of such a derivative in a general stochastic volatility framework.
- Subjects
PRICING; FOURIER transforms; OPTIONS (Finance); SWITCHING theory; CONTINUOUS time systems; MARKOV processes; MARKET volatility
- Publication
International Journal of Theoretical & Applied Finance, 2012, Vol 15, Issue 5, p-1
- ISSN
0219-0249
- Publication type
Article
- DOI
10.1142/S0219024912500379