Pricing external barrier options in a regime-switching model

Jerim Kim; Jeongsim Kim; Hyun Joo Yoo; Bara Kim

doi:10.1016/j.jedc.2015.02.007

Pricing external barrier options in a regime-switching model

Jerim Kim, Jeongsim Kim, Hyun Joo Yoo, Bara Kim

Department of Mathematics

Research output: Contribution to journal › Article › peer-review

7 Citations (Scopus)

Abstract

External barrier options are two-asset options where the payoff is defined on one asset and the barrier is defined on another asset. In this paper, we derive the Laplace transforms of the prices and deltas for the external single and double barrier options where the underlying asset prices follow a regime-switching model with finite regimes. The derivation is made possible because we can obtain the joint Laplace transform of the first passage time of one asset value and the value of the other asset. Numerical inversion of the Laplace transforms is used to calculate the prices of external barrier options.

Original language	English
Pages (from-to)	123-143
Number of pages	21
Journal	Journal of Economic Dynamics and Control
Volume	53
DOIs	https://doi.org/10.1016/j.jedc.2015.02.007
Publication status	Published - 2015 Apr 1

Keywords

External barrier option
First passage time
Laplace transform
Option price
Regime-switching
Sylvester matrix equation

ASJC Scopus subject areas

Economics and Econometrics
Control and Optimization
Applied Mathematics

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10.1016/j.jedc.2015.02.007

Cite this

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title = "Pricing external barrier options in a regime-switching model",

abstract = "External barrier options are two-asset options where the payoff is defined on one asset and the barrier is defined on another asset. In this paper, we derive the Laplace transforms of the prices and deltas for the external single and double barrier options where the underlying asset prices follow a regime-switching model with finite regimes. The derivation is made possible because we can obtain the joint Laplace transform of the first passage time of one asset value and the value of the other asset. Numerical inversion of the Laplace transforms is used to calculate the prices of external barrier options.",

keywords = "External barrier option, First passage time, Laplace transform, Option price, Regime-switching, Sylvester matrix equation",

author = "Jerim Kim and Jeongsim Kim and {Joo Yoo}, Hyun and Bara Kim",

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AU - Kim, Jeongsim

AU - Joo Yoo, Hyun

AU - Kim, Bara

N1 - Funding Information: We are grateful to the referees for their many valuable comments and suggestions which significantly improved this paper. B. Kims research was supported by the National Research Foundation of Korea (NRF) Grant funded by the Korea government(MSIP) (No. 2014R1A2A2A01005831 ). Publisher Copyright: © 2015 Elsevier B.V.

PY - 2015/4/1

Y1 - 2015/4/1

N2 - External barrier options are two-asset options where the payoff is defined on one asset and the barrier is defined on another asset. In this paper, we derive the Laplace transforms of the prices and deltas for the external single and double barrier options where the underlying asset prices follow a regime-switching model with finite regimes. The derivation is made possible because we can obtain the joint Laplace transform of the first passage time of one asset value and the value of the other asset. Numerical inversion of the Laplace transforms is used to calculate the prices of external barrier options.

AB - External barrier options are two-asset options where the payoff is defined on one asset and the barrier is defined on another asset. In this paper, we derive the Laplace transforms of the prices and deltas for the external single and double barrier options where the underlying asset prices follow a regime-switching model with finite regimes. The derivation is made possible because we can obtain the joint Laplace transform of the first passage time of one asset value and the value of the other asset. Numerical inversion of the Laplace transforms is used to calculate the prices of external barrier options.

KW - External barrier option

KW - First passage time

KW - Laplace transform

KW - Option price

KW - Regime-switching

KW - Sylvester matrix equation

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DO - 10.1016/j.jedc.2015.02.007

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EP - 143

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

ER -

Pricing external barrier options in a regime-switching model

Abstract

Keywords

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