Exotic derivatives under stochastic volatility models with jumps

DOI10.1007/978-3-642-18412-3_17MaRDI QIDQ5198570zbMATH OpenOpenAlexFDO

Authors Aleksandar Mijatović, Martijn R. Pistorius

Publication date 8 August 2011

Published in Advanced Mathematical Methods for Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0912.2595

zbMATH Keywords

volatility derivativesvolatility surfacestochastic volatility models with jumpsdouble barrier optionforward starting optionscomplex matrix Wiener-Hopf factorizationfluid embedding

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Markov renewal processes, semi-Markov processes (60K15)

Abstract: In equity and foreign exchange markets the risk-neutral dynamics of the underlying asset are commonly represented by stochastic volatility models with jumps. In this paper we consider a dense subclass of such models and develop analytically tractable formulae for the prices of a range of first-generation exotic derivatives. We provide closed form formulae for the Fourier transforms of vanilla and forward starting option prices as well as a formula for the slope of the implied volatility smile for large strikes. A simple explicit approximation formula for the variance swap price is given. The prices of volatility swaps and other volatility derivatives are given as a one-dimensional integral of an explicit function. Analytically tractable formulae for the Laplace transform (in maturity) of the double-no-touch options and the Fourier-Laplace transform (in strike and maturity) of the double knock-out call and put options are obtained. The proof of the latter formulae is based on extended matrix Wiener-Hopf factorisation results. We also provide convergence results.

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