Path-dependent Option Valuation when the Underlying Path is Discontinuous
Author | : Chunsheng Zhou |
Publisher | : |
Total Pages | : 21 |
Release | : 1997 |
Genre | : |
ISBN | : |
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The payoffs of path-dependent options depend not only on the nal values, but also on the sample paths of the prices of the underlying assets. A rigorous modeling of the under-lying asset price processes which can appropriately describe the sample paths is therefore critical for pricing path-dependent options. This paper allows for discontinuities in the sample paths of the underlying asset prices by assuming that these prices follow jump di usion processes. A general yet tractable approach is presented to value a variety of path-dependent options with discontinuous processes. The numerical examples show that ignoring the jump risk may lead to serious biases in path- dependent option pricing.