Matching asymptotics in path-dependent option pricing |
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Authors: | Sang-Hyeon Park Sun-Yong Choi |
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Institution: | Department of Mathematics, Yonsei University, Seoul, Republic of Korea |
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Abstract: | The valuation of path-dependent options in finance creates many interesting mathematical challenges. Among them are a large Delta and Gamma near the expiry leading to a big error in pricing those exotic options as well as European vanilla options. Also, the higher order corrections of the asymptotic prices of the derivatives in some stochastic volatility models are difficult to be evaluated. In this paper we use the method of matched asymptotic expansions to obtain more practical values of lookback and barrier option prices near the expiry. Our results verify that matching asymptotics is a useful tool for PDE methods in path-dependent option pricing. |
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Keywords: | Path-dependent option Stochastic volatility Singularity Matched asymptotic expansion |
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