Geometric step options and Lévy models: duality, pides, and semi-analytical pricing

DOI10.3934/FMF.2021001zbMATH Open1498.91437arXiv2002.09911OpenAlexW3175189338MaRDI QIDQ2170289FDOQ2170289

Authors: Walter Farkas, Ludovic Mathys 

Publication date: 30 August 2022

Published in: Frontiers of Mathematical Finance (Search for Journal in Brave)

Abstract: The present article studies geometric step options in exponential L'evy markets. Our contribution is manifold and extends several aspects of the geometric step option pricing literature. First, we provide symmetry and parity relations and derive various characterizations for both European-type and American-type geometric double barrier step options. In particular, we are able to obtain a jump-diffusion disentanglement for the early exercise premium of American-type geometric double barrier step contracts and its maturity-randomized equivalent as well as to characterize the diffusion and jump contributions to these early exercise premiums separately by means of partial integro-differential equations and ordinary integro-differential equations. As an application of our characterizations, we derive semi-analytical pricing results for (regular) European-type and American-type geometric down-and-out step call options under hyper-exponential jump-diffusion models. Lastly, we use the latter results to discuss the early exercise structure of geometric step options once jumps are added and to subsequently provide an analysis of the impact of jumps on the price and hedging parameters of (European-type and American-type) geometric step contracts.

Full work available at URL: https://arxiv.org/abs/2002.09911

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zbMATH Keywords

American-type optionsgeometric step optionsjump-diffusion disentanglementmaturity-randomizationLévy markets

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Integro-partial differential equations (45K05) Integro-ordinary differential equations (45J05)

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