East Asian mathematical journal

The Youngnam Mathematical Society (영남수학회)
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PRICING OF TIMER DIGITAL POWER OPTIONS BASED ON STOCHSTIC VOLATILITY

  • Mijin Ha (Department of Mathematics Pusan National University) ;
  • Sangmin Park (Department of Mathematics Pusan National University) ;
  • Donghyun Kim (Donghyun Kim Department of Mathematics Pusan National University) ;
  • Ji-Hun Yoon (Department of Mathematics & Institute of Mathematical Science Pusan National University)
  • Received : 2023.10.26
  • Accepted : 2023.12.13
  • Published : 2024.01.31
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Abstract

Timer options are financial instruments proposed by Société Générale Corporate and Investment Banking in 2007. Unlike vanilla options, where the expiry date is fixed, the expiry date of timer options is determined by the investor's choice, which is in linked to a variance budget. In this study, we derive a pricing formula for hybrid options that combine timer options, digital options, and power options, considering an environment where volatility of an underlying asset follows a fast-mean-reverting process. Additionally, we aim to validate the pricing accuracy of these analytical formulas by comparing them with the results obtained from Monte Carlo simulations. Finally, we conduct numerical studies on these options to analyze the impact of stochastic volatility on option's price with respect to various model parameters.

Keywords

Acknowledgement

This work was supported by a 2-Year Research Grant of Pusan National University.

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