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A transform approach to compute prices and greeks of barrier options driven by a class of Levy processes

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  • Marc Jeannin
  • Martijn Pistorius

Abstract

In this paper we propose a transform method to compute the prices and greeks of barrier options driven by a class of Levy processes. We derive analytical expressions for the Laplace transforms in time of the prices and sensitivities of single barrier options in an exponential Levy model with hyper-exponential jumps. Inversion of these single Laplace transform yields rapid, accurate results. These results are employed to construct an approximation of the prices and sensitivities of barrier options in exponential generalised hyper-exponential (GHE) Levy models. The latter class includes many of the Levy models employed in quantitative finance such as the variance gamma (VG), KoBoL, generalised hyperbolic, and the normal inverse Gaussian (NIG) models. Convergence of the approximating prices and sensitivities is proved. To provide a numerical illustration, this transform approach is compared with Monte Carlo simulation in the cases that the driving process is a VG and a NIG Levy process. Parameters are calibrated to Stoxx50E call options.

Suggested Citation

  • Marc Jeannin & Martijn Pistorius, 2008. "A transform approach to compute prices and greeks of barrier options driven by a class of Levy processes," Papers 0812.3128, arXiv.org, revised Mar 2009.
    • Handle: RePEc:arx:papers:0812.3128
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    References listed on IDEAS

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    1. S. G. Kou, 2002. "A Jump-Diffusion Model for Option Pricing," Management Science, INFORMS, vol. 48(8), pages 1086-1101, August.
    2. Svetlana I Boyarchenko & Sergei Z Levendorskii, 2002. "Non-Gaussian Merton-Black-Scholes Theory," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 4955, January.
    3. Soeren Asmussen & Dilip Madan & Martijn Pistorius, 2007. "Pricing Equity Default Swaps under an approximation to the CGMY L\'{e}% vy Model," Papers 0711.2807, arXiv.org.
    4. Asmussen, Søren & Avram, Florin & Pistorius, Martijn R., 2004. "Russian and American put options under exponential phase-type Lévy models," Stochastic Processes and their Applications, Elsevier, vol. 109(1), pages 79-111, January.
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    Cited by:

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    3. C. E. Phelan & D. Marazzina & G. Germano, 2020. "Pricing methods for α-quantile and perpetual early exercise options based on Spitzer identities," Quantitative Finance, Taylor & Francis Journals, vol. 20(6), pages 899-918, June.

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