A spectral approach to pricing of forward starting options

Kevin Z. Tong, Dongping Hou, Jianhua Guan

Abstract


We propose a new class of models for pricing forward starting options. We assume that the asset price is a nonlinear function of a CIR process, time changed by a composition of a Levy subordinator and an absolutely ´ continuous process. The new models introduce the nonlinearity in both drift and diffusion components of the underlying process and can capture jumps and stochastic volatility in a flexible way. By employing the spectral expansion technique, we are able to derive the analytical formulas for the forward starting option prices. We also implement a specific model numerically and test its sensitivity to some of the key parameters of the model.

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Published: 2019-05-15

How to Cite this Article:

Kevin Z. Tong, Dongping Hou, Jianhua Guan, A spectral approach to pricing of forward starting options, Mathematical Finance Letters, Vol 2019 (2019), Article ID 2

Copyright © 2019 Kevin Z. Tong, Dongping Hou, Jianhua Guan. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Mathematical Finance Letters

ISSN 2051-2929

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