Pricing Cliquet Options in Jump-Diffusion Models

DOI10.1080/15326340500294587MaRDI QIDQ5711157zbMATH OpenOpenAlexFDO

Authors

Publication date 9 December 2005

Published in Stochastic Models (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1080/15326340500294587

zbMATH Keywords

cliquet optionsequivalent martingale measurejump-diffusion modelsoption pricing

Mathematics Subject Classification ID

Applications of stochastic analysis (to PDEs, etc.) (60H30) Diffusion processes (60J60) Derivative securities (option pricing, hedging, etc.) (91G20)

Review text

The market model provides a riskless stock (bond) \((B_t= 1)\), two risky stocks driven by a standard Brownian motion \(W\) and a Poisson jump process \(N\) with a deterministic bounded intensity \((\lambda_t, t\geq 0)\): \[ sS^i_t= S^i_{t-}(u^i_t dt+ \sigma^i_t dB_t+ \gamma^i_t dN_t),\quad i= 1,2,\quad t\in [0,T], \] \(u^i\), \(\sigma^i\), \(\gamma^i\) are deterministic càdlàg bounded functions on \([0, T]\), \(\gamma^i_t> -1\) so that the prices \(S^i\) are nonnegative. This model admits a unique risk neutral probability measure [cf. \textit{N. Bellamy} and \textit{M. Jeanblanc}, Finance Stoch. 4, No. 2, 209--222 (2000; Zbl 0951.91028) and \textit{N. Bellamy}, J. Math. Econ. 35, No. 2, 259--287 (2001; Zbl 0987.91032)]. The aim is to price a ``Cliquet option with a resetting time \(t_c\), more precisely meaning that the terminal gain of the Cliquet option on stock \(S\) is \(\max[\delta(S_T- K),\delta(S_{t_c}- K), O]\), \(t_c< T\), \(\delta= 1\) for a call option and \(\delta=-1\) for a put option, \(K\) is the strike price. The main result is the explicit value of such an option under the assumption \(\gamma^i\) constant. Finally, the value of the Cliquet option is approximated when \(y^i\) are increasing limits of piecewise constant deterministic time functions.

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Cites work

• Optimal portfolio for a small investor in a market model with discontinuous prices
• Option Pricing For Jump Diffusions: Approximations and Their Interpretation
• Option pricing when underlying stock returns are discontinuous
• The pricing of options and corporate liabilities

Cited in

(11)

• Cliquet option pricing with Meixner processes
• Applications of the central limit theorem for pricing cliquet-style options
• Cliquet option pricing in a jump-diffusion Lévy model
• Pricing and hedging of cliquet options and locally capped contracts
• Numerical Methods and Volatility Models for Valuing Cliquet Options
• Bond and option pricing for interest rate model with clustering effects
• Coupling and option price comparisons in a jump-diffusion model
• SIMPLE PROCESSES AND THE PRICING AND HEDGING OF CLIQUETS
• Pricing cliquet options by tree methods
• A forward started jump-diffusion model and pricing of cliquet style exotics
• Forward starting options pricing under a regime-switching jump-diffusion model with Wishart stochastic volatility and stochastic interest rate

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