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Mathematical Finance Letters ISSN 2051-2929

Archives › Volume 2019 (2019)

Math. Finance Lett. 2019 (2019), Article ID 2

A spectral approach to pricing of forward starting options

Kevin Z. Tong, Dongping Hou, Jianhua Guan

PDF (188.2 KB) https://doi.org/10.28919/mfl/4036

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.

Published
15 May 2019
Volume
2019 (2019)
License
CC BY 3.0

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.

Cite this article

K. Z. Tong, D. Hou, J. Guan, A spectral approach to pricing of forward starting options, Math. Finance Lett. 2019 (2019), 2. https://doi.org/10.28919/mfl/4036

BibTeX
@article{Tong2019,
  author  = {Tong, Kevin Z. and Hou, Dongping and Guan, Jianhua},
  title   = {A spectral approach to pricing of forward starting options},
  journal = {Math. Finance Lett.},
  volume  = {2019},
  year    = {2019},
  pages   = {2},
  doi     = {10.28919/mfl/4036}
}