Valuation of futures options with initial margin requirements and daily price limit (Q2269620): Difference between revisions
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Latest revision as of 14:13, 2 July 2024
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English | Valuation of futures options with initial margin requirements and daily price limit |
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Valuation of futures options with initial margin requirements and daily price limit (English)
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17 March 2010
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The authors consider a financial market, where there are two basic assets traded. One is the riskless bond \(B\) with interest rate \(r\) satisfying \(B(t)=1+\int_{0}^{t}r(s)B(s)ds\). The other is the future contract \(F\) with daily price limits denoted by \(a\) and \(b\). Assume that the price \(\{F(t)\}_{0\leq t\leq h}\) in a single day satisfies the following stochastic differential equation: \(dF(s)=\mu(s){\mathbf 1}_{(a,b)}(F(s))F(s)ds+\sigma(s){\mathbf 1}_{(a,b)}(F(s))F(s)dW(s)\), \(F(0)=f\), which indicates that the boundaries \(a\) and \(b\) are absorbing. Here \(W(\cdot)\) is a standard one-dimensional Brownian motion. It is assumed that at time \(t\), the trader invests \(n_{0}(t)B(t)\) in the riskless bond, and \(\pi(t)=n_1(t)F(t)\) in the future contracts where no cost is caused when writing the future contracts, but some initial margin must be put in his margin account deposits. It is supposed that during \((t,t+dt)\) the trader's opportunity cost of margin associated with his future transactions is \(| \pi(t)|\beta(t)dt\), where the bounded continuous process \(\beta(t)>0\) is the opportunity cost per dollar in the percentage. The authors obtain the explicit expression of the price of call and put futures options and show that these prices are the unique solutions of the associated nonlinear partial differential equations. The authors extend the intra-day futures options pricing model to the multi-day one.
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valuation of future option
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initial margin requirements
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daily price limit
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backward stochastic differential equations
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