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Pricing holder-extendable options in a stochastic volatility model with an ornstein-uhlenbeck process

Ibrahim, SNI and Ng, TW and O'Hara, JG and Nawawi, A (2017) 'Pricing holder-extendable options in a stochastic volatility model with an ornstein-uhlenbeck process.' Malaysian Journal of Mathematical Sciences, 11 (1). 1 - 8. ISSN 1823-8343

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Abstract

Holder-extendable options are characterized by two maturity dates, which means the option can be exercised at either the expiration date or the extended maturity date. This paper develops a pricing framework for holder-extendable options which deals with the extended version of a stochastic volatility model with an Ornstein-Uhlenbeck (OU) process. The extended model allows correlation between volatility and asset returns. The method uses Fourier inversion techniques that does not require an initial guess of the characteristic functions. A closed-form pricing formula for holder-extendable options is derived for logarithmic asset price dynamics.

Item Type: Article
Uncontrolled Keywords: Holder-extendable option, Ornstein-Uhlenbeck process, Fourier inversion, stochastic volatility.
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Science and Health > Computer Science and Electronic Engineering, School of
Depositing User: Jim Jamieson
Date Deposited: 20 Jun 2017 14:51
Last Modified: 25 Sep 2018 13:15
URI: http://repository.essex.ac.uk/id/eprint/19898

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