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Homotopy Analysis Method for Boundary‐Value Problem of Turbo Warrant Pricing under Stochastic Volatility

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  • Hoi Ying Wong
  • Mei Choi Chiu

Abstract

Turbo warrants are liquidly traded financial derivative securities in over‐the‐counter and exchange markets in Asia and Europe. The structure of turbo warrants is similar to barrier options, but a lookback rebate will be paid if the barrier is crossed by the underlying asset price. Therefore, the turbo warrant price satisfies a partial differential equation (PDE) with a boundary condition that depends on another boundary‐value problem (BVP) of PDE. Due to the highly complicated structure of turbo warrants, their valuation presents a challenging problem in the field of financial mathematics. This paper applies the homotopy analysis method to construct an analytic pricing formula for turbo warrants under stochastic volatility in a PDE framework.

Suggested Citation

  • Hoi Ying Wong & Mei Choi Chiu, 2013. "Homotopy Analysis Method for Boundary‐Value Problem of Turbo Warrant Pricing under Stochastic Volatility," Abstract and Applied Analysis, John Wiley & Sons, vol. 2013(1).
    • Handle: RePEc:wly:jnlaaa:v:2013:y:2013:i:1:n:682524
    DOI: 10.1155/2013/682524
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    References listed on IDEAS

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    1. Jing Zhao & Hoi Ying Wong, 2012. "A closed-form solution to American options under general diffusion processes," Quantitative Finance, Taylor & Francis Journals, vol. 12(5), pages 725-737, July.
    2. Song-Ping Zhu, 2006. "An exact and explicit solution for the valuation of American put options," Quantitative Finance, Taylor & Francis Journals, vol. 6(3), pages 229-242.
    3. Yue-Kuen Kwok, 2008. "Mathematical Models of Financial Derivatives," Springer Finance, Springer, edition 2, number 978-3-540-68688-0, March.
    4. Hoi Ying Wong & Chun Man Chan, 2008. "Turbo warrants under stochastic volatility," Quantitative Finance, Taylor & Francis Journals, vol. 8(7), pages 739-751.
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    Cited by:

    1. Mei Choi Chiu & Hoi Ying Wong, 2014. "Optimal Investment for Insurers with the Extended CIR Interest Rate Model," Abstract and Applied Analysis, John Wiley & Sons, vol. 2014(1).

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