Compound option pricing under fuzzy environment

DOI10.1155/2014/875319MaRDI QIDQ1714799zbMATH OpenOpenAlexWikidataFDO

Authors Xiandong Wang, Shouwei Li, Jianmin He

Publication date 1 February 2019

Published in Journal of Applied Mathematics (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://doi.org/10.1155/2014/875319

Mathematics Subject Classification ID

Theory of fuzzy sets, etc. (03E72) Portfolio theory (91G10) Derivative securities (option pricing, hedging, etc.) (91G20) Financial applications of other theories (91G80)

Review text

Summary: Considering the uncertainty of a financial market includes two aspects: risk and vagueness; in this paper, fuzzy sets theory is applied to model the imprecise input parameters (interest rate and volatility). We present the fuzzy price of compound option by fuzzing the interest and volatility in Geske's compound option pricing formula. For each \(\alpha\), the \(\alpha\)-level set of fuzzy prices is obtained according to the fuzzy arithmetics and the definition of fuzzy-valued function. We apply a defuzzification method based on crisp possibilistic mean values of the fuzzy interest rate and fuzzy volatility to obtain the crisp possibilistic mean value of compound option price. Finally, we present a numerical analysis to illustrate the compound option pricing under fuzzy environment.

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