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Abstract
In the article barrier options are analytically evaluated under the regime-switching model, with the volatility of the underlying price being allowed to jump between different states following a Markov chain. The target barrier option prices are expressed in a Fourier cosine series after a particular approximation formula is obtained. The accuracy and efficiency of the newly derived formula are demonstrated through numerical experiments, demonstrating the formula’s potential for practical applications.
TOPICS: Analysis of individual factors/risk premia, factor-based models, options
Key Findings
• Barrier options are analytically evaluated under the regime-switching model.
• This approximation formula is written in the form of a converged Fourier cosine series.
• The formula is shown to be very accurate and efficient, and has a great potential to be applied in practice.
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Don’t have access? Click here to request a demo
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600