Numerical Methods and Volatility Models for Valuing Cliquet Options
Several numerical issues for valuing cliquet options using PDE methods are investigated. The use of a running sum of returns formulation is compared to an average return formulation. Methods for grid construction, interpolation of jump conditions, and application of boundary conditions are compared. The effect of various volatility modelling assumptions on the value of cliquet options is also studied. Numerical results are reported for jump diffusion models, calibrated volatility surface models, and uncertain volatility models.
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Volume (Year): 13 (2006)
Issue (Month): 4 ()
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- Merton, Robert C., 1976.
"Option pricing when underlying stock returns are discontinuous,"
Journal of Financial Economics,
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- T. J. Lyons, 1995. "Uncertain volatility and the risk-free synthesis of derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(2), pages 117-133.
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