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Valuing qualitative options with stochastic volatility

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  • Bong-Gyu Jang
  • Kum-Hwan Roh

Abstract

We find a closed-form formula for valuing a time-switch option where its underlying asset is affected by a stochastically changing market environment, and apply it to the valuation of other qualitative options such as corridor options and options in foreign exchange markets. The stochastic market environment is modeled as a Markov regime-switching process. This analytic formula provides us with a rapid and accurate scheme for valuing qualitative options with stochastic volatility.

Suggested Citation

  • Bong-Gyu Jang & Kum-Hwan Roh, 2009. "Valuing qualitative options with stochastic volatility," Quantitative Finance, Taylor & Francis Journals, vol. 9(7), pages 819-825.
    • Handle: RePEc:taf:quantf:v:9:y:2009:i:7:p:819-825
    DOI: 10.1080/14697680802629392
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    References listed on IDEAS

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    Cited by:

    1. Kim, Byung-June & Jang, Bong-Gyu, 2021. "Convertible bond valuation with regime switching," Chaos, Solitons & Fractals, Elsevier, vol. 150(C).

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