Pricing holder-extendable options in a stochastic volatility model with an Ornstein-Uhlenbeck process
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 volatili...
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Institute for Mathematical Research, Universiti Putra Malaysia
2017
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Online Access: | http://psasir.upm.edu.my/id/eprint/51691/1/1.pdf http://psasir.upm.edu.my/id/eprint/51691/ http://einspem.upm.edu.my/journal/fullpaper/vol11/1.pdf |
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my.upm.eprints.516912017-04-27T09:55:07Z http://psasir.upm.edu.my/id/eprint/51691/ Pricing holder-extendable options in a stochastic volatility model with an Ornstein-Uhlenbeck process Ibrahim, Siti Nur Iqmal Ng, Teck Wee O'Hara, John G. Nawawi, A. 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. Institute for Mathematical Research, Universiti Putra Malaysia 2017 Article PeerReviewed application/pdf en http://psasir.upm.edu.my/id/eprint/51691/1/1.pdf Ibrahim, Siti Nur Iqmal and Ng, Teck Wee and O'Hara, John G. 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). pp. 1-8. ISSN 1823-8343; ESSN: 2289-750X http://einspem.upm.edu.my/journal/fullpaper/vol11/1.pdf |
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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. |
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Article |
author |
Ibrahim, Siti Nur Iqmal Ng, Teck Wee O'Hara, John G. Nawawi, A. |
spellingShingle |
Ibrahim, Siti Nur Iqmal Ng, Teck Wee O'Hara, John G. Nawawi, A. Pricing holder-extendable options in a stochastic volatility model with an Ornstein-Uhlenbeck process |
author_facet |
Ibrahim, Siti Nur Iqmal Ng, Teck Wee O'Hara, John G. Nawawi, A. |
author_sort |
Ibrahim, Siti Nur Iqmal |
title |
Pricing holder-extendable options in a stochastic volatility model with an Ornstein-Uhlenbeck process |
title_short |
Pricing holder-extendable options in a stochastic volatility model with an Ornstein-Uhlenbeck process |
title_full |
Pricing holder-extendable options in a stochastic volatility model with an Ornstein-Uhlenbeck process |
title_fullStr |
Pricing holder-extendable options in a stochastic volatility model with an Ornstein-Uhlenbeck process |
title_full_unstemmed |
Pricing holder-extendable options in a stochastic volatility model with an Ornstein-Uhlenbeck process |
title_sort |
pricing holder-extendable options in a stochastic volatility model with an ornstein-uhlenbeck process |
publisher |
Institute for Mathematical Research, Universiti Putra Malaysia |
publishDate |
2017 |
url |
http://psasir.upm.edu.my/id/eprint/51691/1/1.pdf http://psasir.upm.edu.my/id/eprint/51691/ http://einspem.upm.edu.my/journal/fullpaper/vol11/1.pdf |
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13.18916 |