Valuation Of Boundary-Linked Assets
AbstractThis 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.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb045720.
Date of creation: Nov 2004
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-12-02 (All new papers)
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