Fast Pricing of Cliquet Options with Global Floor

Abstract

Retail investors are especially fond of investments that capture the upside of a risky equity portfolio while providing protection on the downside, and financial institutions have responded with a wide variety of such products. One variant consists of a bond plus a cliquet option that sets both a minimum return in each period and also a floor on the total lifetime payoff. Pricing and hedging the derivative component is possible with standard Monte Carlo or PDE techniques, but it is a difficult problem and convergence is slow and erratic. The Fourier transform approach is promising, but it also suffers from convergence problems. This article develops a way to overcome these convergence problems, which leads to a major improvement in performance.