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Analytic Approximation of Finite‐Maturity Timer Option Prices

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  • Minqiang Li
  • Fabio Mercurio

Abstract

We develop an approximation technique for pricing finite‐maturity timer options under Heston‐like stochastic volatility models. By approximating the distributions of the accumulated variance and the random variance budget exceeding time, we obtain analytic expressions for timer option prices under zero correlation. For nonzero correlation, we use a simple linear combination approximation which matches the asymptotic correlation behavior. Numerical analysis using the Heston model shows that the method is fairly accurate, especially when the volatility of variance is small or the maximum maturity is large. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:245–273, 2015

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  • Minqiang Li & Fabio Mercurio, 2015. "Analytic Approximation of Finite‐Maturity Timer Option Prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(3), pages 245-273, March.
    • Handle: RePEc:wly:jfutmk:v:35:y:2015:i:3:p:245-273
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    References listed on IDEAS

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    Cited by:

    1. Zhenyu Cui & J. Lars Kirkby & Guanghua Lian & Duy Nguyen, 2017. "Integral Representation Of Probability Density Of Stochastic Volatility Models And Timer Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(08), pages 1-32, December.
    2. Minqiang Li & Fabio Mercurio, 2014. "Closed-Form Approximation Of Perpetual Timer Option Prices," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(04), pages 1-34.
    3. Pingping Zeng & Yue Kuen Kwok & Wendong Zheng, 2015. "Fast Hilbert Transform Algorithms For Pricing Discrete Timer Options Under Stochastic Volatility Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(07), pages 1-26, November.
    4. Ha, Mijin & Kim, Donghyun & Yoon, Ji-Hun, 2024. "Valuing of timer path-dependent options," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 215(C), pages 208-227.
    5. Wendong Zheng & Pingping Zeng, 2016. "Pricing timer options and variance derivatives with closed-form partial transform under the 3/2 model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 23(5), pages 344-373, September.
    6. Kwangil Bae, 2019. "Valuation and applications of compound basket options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(6), pages 704-720, June.

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    More about this item

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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