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Fourier Transform Methods for Regime-Switching Jump-Diffusions and the Pricing of Forward Starting Options


  • Alessandro Ramponi


In this paper we consider a jump-diffusion dynamic whose parameters are driven by a continuous time and stationary Markov Chain on a finite state space as a model for the underlying of European contingent claims. For this class of processes we firstly outline the Fourier transform method both in log-price and log-strike to efficiently calculate the value of various types of options and as a concrete example of application, we present some numerical results within a two-state regime switching version of the Merton jump-diffusion model. Then we develop a closed-form solution to the problem of pricing a Forward Starting Option and use this result to approximate the value of such a derivative in a general stochastic volatility framework.

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  • Alessandro Ramponi, 2011. "Fourier Transform Methods for Regime-Switching Jump-Diffusions and the Pricing of Forward Starting Options," Papers 1105.4567,
  • Handle: RePEc:arx:papers:1105.4567

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    References listed on IDEAS

    1. Giuseppe Di Graziano & L. C. G. Rogers, 2009. "Equity with Markov-modulated dividends," Quantitative Finance, Taylor & Francis Journals, vol. 9(1), pages 19-26.
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