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Valuation of boundary-linked assets

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  • Esteban-Bravo, Mercedes
  • Vidal-Sanz, Jose M.

Abstract

This article studies the valuation of boundary-linked assets and their derivatives in continuous-time markets. Valuing boundary-linked assets requires the solution of a stochastic differential equation with boundary conditions, which, often, is not Markovian. We propose a wavelet-collocation algorithm for solving a Milstein approximation to the stochastic boundary problem. Its convergence properties are studied. Furthermore, we value boundary-linked derivatives using Malliavin calculus and Monte Carlo methods. We apply these ideas to value European call options of boundary-linked assets

Suggested Citation

  • Esteban-Bravo, Mercedes & Vidal-Sanz, Jose M., 2004. "Valuation of boundary-linked assets," DEE - Working Papers. Business Economics. WB wb045720, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    • Handle: RePEc:cte:wbrepe:wb045720
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