Pricing exotic options using the Wang transform
The Wang transform allows for a simple, yet intuitive approach to pricing options with underlying based on geometric Brownian motion. This paper shows how the approach by Hamada and Sherris can be used to price some exotic options. Examples showing the convergence of the Wang price to the Black–Scholes price for a Margrabe option, a geometric basket option and an asset-or-nothing option are given. We also take a look at the range of prices achievable using the Wang transform for these options.
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Volume (Year): 25 (2013)
Issue (Month): C ()
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- Mahmoud Hamada & Michael Sherris, 2003. "Contingent claim pricing using probability distortion operators: methods from insurance risk pricing and their relationship to financial theory," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(1), pages 19-47.
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