Analytical Valuation of Turbo Warrants under Double Exponential Jump Diffusion

Abstract

A turbo call warrant is a kind of barrier option, which pays off like a European call if the barrier is not reached before expiration, but crossing the barrier causes the original call to be replaced by a lookback call with a different strike. This complicated instrument is strangely popular in the market. But valuation clearly presents some serious challenges. In this article, Wong and Lau dive into the problem and manage to obtain a closed-form pricing equation for the case in which the underlying asset follows a double exponential jump diffusion process.

TOPICS: Options, statistical methods