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Fourier Transform Methods For Regime-Switching Jump-Diffusions And The Pricing Of Forward Starting Options

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  • ALESSANDRO RAMPONI

    ()
    (Department of Economics and Finance, University of Rome, Tor Vergata, via Columbia, 2, 00133, Rome, Italy)

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    Abstract

    In this paper we consider a jump-diffusion dynamic whose parameters are driven by a continuous time and stationary Markov Chain on a finite state space as a model for the underlying of European contingent claims. For this class of processes we firstly outline the Fourier transform method both in log-price and log-strike to efficiently calculate the value of various types of options and as a concrete example of application, we present some numerical results within a two-state regime switching version of the Merton jump-diffusion model. Then we develop a closed-form solution to the problem of pricing a Forward Starting Option and use this result to approximate the value of such a derivative in a general stochastic volatility framework.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 15 (2012)
    Issue (Month): 05 ()
    Pages: 1250037-1-1250037-26

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    Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:05:p:1250037-1-1250037-26

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    Keywords: Regime switching jump-diffusion models; Fourier transform methods; option pricing; Forward Starting options; stochastic volatility models;

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