Journal
INTERNATIONAL JOURNAL OF THEORETICAL AND APPLIED FINANCE
Volume 15, Issue 5, Pages -Publisher
WORLD SCIENTIFIC PUBL CO PTE LTD
DOI: 10.1142/S0219024912500379
Keywords
Regime switching jump-diffusion models; Fourier transform methods; option pricing; Forward Starting options; stochastic volatility models
Categories
Funding
- PRIN, Probability and Finance [2008YYYBE4]
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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.
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