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Pattern derivatives

Author

Listed:
  • Casey S. Schroeder
  • Massimo Di Pierro

Abstract

In this paper, we propose a new type of derivative called a pattern derivative. In the simple case of an asset that moves up u or down d in value, a pattern is a sequence of {u, d} movements that may occur before expiration. We provide general pricing formulas that rely on a brute force approach as well as efficient valuation algorithms based on recursive formulas for the probability of patterns to occur. We generalise our results to exclusive, inclusive, and multi-pattern options. Finally, we discuss the possible benefits of this type of options.

Suggested Citation

  • Casey S. Schroeder & Massimo Di Pierro, 2011. "Pattern derivatives," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 2(4), pages 249-257.
    • Handle: RePEc:ids:ijfmkd:v:2:y:2011:i:4:p:249-257
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