Bounds for Asian basket options

In this paper we propose pricing bounds for European-style discrete arithmetic Asian basket options in a Black and Scholes framework. We start from methods used for basket options and Asian options. First, we use the general approach for deriving upper and lower bounds for stop-loss premia of sums of non-independent random variables as in Kaas et al. [Upper and lower bounds for sums of random variables, Insurance Math. Econom. 27 (2000) 151–168] or Dhaene et al. [The concept of comonotonicity in actuarial science and finance: theory, Insurance Math. Econom. 31(1) (2002) 3–33]. We generalize the methods in Deelstra et al. [Pricing of arithmetic basket options by conditioning, Insurance Math. Econom. 34 (2004) 55–57] and Vanmaele et al. [Bounds for the price of discrete sampled arithmetic Asian options, J. Comput. Appl. Math. 185(1) (2006) 51–90]. Afterwards we show how to derive an analytical closed-form expression for a lower bound in the non-comonotonic case. Finally, we derive upper bounds for Asian basket options by applying techniques as in Thompson [Fast narrow bounds on the value of Asian options, Working Paper, University of Cambridge, 1999] and Lord [Partially exact and bounded approximations for arithmetic Asian options, J. Comput. Finance 10 (2) (2006) 1–52]. Numerical results are included and on the basis of our numerical tests, we explain which method we recommend depending on moneyness and time-to-maturity.     

Moment matching approximation of Asian basket option prices

In this paper we propose some moment matching pricing methods for European-style discrete arithmetic Asian basket options in a Black & Scholes framework. We generalize the approach of [M. Curran, Valuing Asian and portfolio by conditioning on the geometric mean price, Management Science 40 (1994) 1705-1711] and of [G. Deelstra, J. Liinev, M. Vanmaele, Pricing of arithmetic basket options by conditioning, Insurance: Mathematics & Economics 34 (2004) 55-57] in several ways. We create a framework that allows for a whole class of conditioning random variables which are normally distributed. We moment match not only with a lognormal random variable but also with a log-extended-skew-normal random variable. We also improve the bounds of [G. Deelstra, I. Diallo, M. Vanmaele, Bounds for Asian basket options, Journal of Computational and Applied Mathematics 218 (2008) 215-228]. Numerical results are included and on the basis of our numerical tests, we explain which method we recommend depending on moneyness and time-to-maturity.     

两个或多个几何平均价格的最小或最大值期权的定价

两个或多个几何平均价格的最小或最大值期权是金融领域极具应用前景的新型复合期权.提出了一种新方法,简单而巧妙地得到了两个几何平均价格的最小值期权价格的解析公式.将该法直接推广,首次得到多个几何平均价格的最小和最大值期权的解析公式.首次给出的数值算例表明两个几何平均价格的最小值期权要比相应的最大值期权便宜,而它们都要比两资产的最大值期权便宜.若考虑红利率,则它们两者的价格都会减少.     

基于加权可能性均值的亚式期权模糊定价

主要探讨不确定环境下用模糊集理论处理亚式期权的定价问题.运用梯形模糊数来表示标的资产价格、无风险利率、红利率和波动率,建立了亚式期权的加权可能性均值模糊定价模型,得到连续几何和算术亚式期权的模糊价格公式.最后通过数值例子表明:亚式期权的加权可能性均值模糊定价模型具有很大的灵活性,更符合现实的不确定情况,具有较强的实用价值.     

Pricing maturity guarantee with dynamic withdrawal benefit

Motivated by the importance of withdrawal benefits for enhancing sales of variable annuities, we propose a new equity-linked product which provides a dynamic withdrawal benefit (DWB) during the contract period and a minimum guarantee at contract maturity. The term DWB is coined to reflect the duality between it and dynamic fund protection. Under the Black-Scholes framework and using results pertaining to reflected Brownian motion, we obtain explicit pricing formulas for the DWB payment stream and the maturity guarantee. These pricing formulas are also derived by means of Esscher transforms, which is another seminal contribution by Gerber to finance. In particular, we show that there are closed-form formulas for pricing European put and call options on a traded asset whose price can be modeled as the exponential of a reflected Brownian motion.     

Pricing and hedging Asian basket spread options

Asian options, basket options and spread options have been extensively studied in the literature. However, few papers deal with the problem of pricing general Asian basket spread options. This paper aims to fill this gap. In order to obtain prices and Greeks in a short computation time, we develop approximation formulae based on comonotonicity theory and moment matching methods. We compare their relative performances and explain how to choose the best approximation technique as a function of the Asian basket spread characteristics. We also give explicitly the Greeks for our proposed methods. In the last section we extend our results to options denominated in foreign currency.     

Closed-Form Pricing of Two-Asset Barrier Options with Stochastic Covariance

Abstract

Single and double barrier options on more than one underlying with stochastic volatility are usually priced via Monte Carlo simulation due to the non-existence of closed-form solutions for their value. In this paper, for a special dependence structure, the prices of some two-asset barrier derivatives, like double-digital options and correlation options can be derived analytically using generalized Fourier transforms and some conditions on the characteristic functions. We study the influence of the various parameters on these prices and show that these formulas can be easily and quickly computed. We also extend our approach to further allow for a random correlation structure.     

The reciprocal of the weighted geometric mean of many positive numbers is a Stieltjes function

In the paper, by the Cauchy integral formula in the theory of complex functions, an integral representation for the reciprocal of the weighted geometric mean of many positive numbers is established. As a result, the reciprocal of the weighted geometric mean of many positive numbers is verified to be a Stieltjes function and, consequently, a (logarithmically) completely monotonic function. Finally, as applications of the integral representation, in the form of remarks, several integral formulas for a kind of improper integrals are derived, an alternative proof of the famous inequality between the weighted arithmetic and geometric means is supplied, and two explicit formulas for the large Schröder numbers are discovered.     

Pricing of Ratchet equity-indexed annuities under stochastic interest rates

We consider the valuation of simple and compound Ratchet equity-indexed annuities (EIAs) in the presence of stochastic interest rates. We assume that the equity index follows a geometric Brownian motion and the short rate follows the extended Vasicek model. Under a given forward measure, we obtain an explicit multivariate normal characterization for multiple log-returns on the equity index. Using such a characterization, closed-form price formulas are derived for both simple and compound Ratchet EIAs. An efficient Monte Carlo simulation scheme is also established to overcome the computational difficulties resulting from the evaluation of high-dimensional multivariate normal cumulative distribution functions (CDFs) embedded in the price formulas as well as the consideration of additional complex contract features. Finally, numerical results are provided to illustrate the computational efficiency of our simulation scheme and the effects of various model and contract parameters on pricing.     

Pricing Asian options of discretely monitored geometric average in the regime‐switching model

This paper provides analytic pricing formulas of discretely monitored geometric Asian options under the regime‐switching model. We derive the joint Laplace transform of the discount factor, the log return of the underlying asset price at maturity, and the logarithm of the geometric mean of the asset price. Then using the change of measures and the inversion of the transform, the prices and deltas of a fixed‐strike and a floating‐strike geometric Asian option are obtained. As the numerical results, we calculate the price of a fixed‐strike and a floating‐strike discrete geometric Asian call option using our formulas and compare with the results of the Monte Carlo simulation. Copyright © 2016 John Wiley & Sons, Ltd.     

Static-arbitrage optimal subreplicating strategies for basket options

In this paper we investigate the possible values of basket options. Instead of postulating a model and pricing the basket option using that model, we consider the set of all models which are consistent with the observed prices of vanilla options of all strikes. In the case of basket options on two components we find, within this class, the model for which the price of the basket option is smallest. This price, as discovered by Rapuch and Roncalli, is associated to the lower Fréchet copula. We complement their result in this paper by describing an optimal subreplicating strategy. This strategy is associated with an explicit portfolio which consists of being long and short a series of calls with strikes chosen as the zeros of an auxiliary function.     

Static super-replicating strategies for a class of exotic options

In this paper, we investigate static super-replicating strategies for European-type call options written on a weighted sum of asset prices. This class of exotic options includes Asian options and basket options among others. We assume that there exists a market where the plain vanilla options on the different assets are traded and hence their prices can be observed in the market. Both the infinite market case (where prices of the plain vanilla options are available for all strikes) and the finite market case (where only a finite number of plain vanilla option prices are observed) are considered. We prove that the finite market case converges to the infinite market case when the number of observed plain vanilla option prices tends to infinity.We show how to construct a portfolio consisting of the plain vanilla options on the different assets, whose pay-off super-replicates the pay-off of the exotic option. As a consequence, the price of the super-replicating portfolio is an upper bound for the price of the exotic option. The super-hedging strategy is model-free in the sense that it is expressed in terms of the observed option prices on the individual assets, which can be e.g. dividend paying stocks with no explicit dividend process known. This paper is a generalization of the work of Simon et al. [Simon, S., Goovaerts, M., Dhaene, J., 2000. An easy computable upper bound for the price of an arithmetic Asian option. Insurance Math. Econom. 26 (2–3), 175–184] who considered this problem for Asian options in the infinite market case. Laurence and Wang [Laurence, P., Wang, T.H., 2004. What’s a basket worth? Risk Mag. 17, 73–77] and Hobson et al. [Hobson, D., Laurence, P., Wang, T.H., 2005. Static-arbitrage upper bounds for the prices of basket options. Quant. Fin. 5 (4), 329–342] considered this problem for basket options, in the infinite as well as in the finite market case.As opposed to Hobson et al. [Hobson, D., Laurence, P., Wang, T.H., 2005. Static-arbitrage upper bounds for the prices of basket options. Quant. Fin. 5 (4), 329–342] who use Lagrange optimization techniques, the proofs in this paper are based on the theory of integral stochastic orders and on the theory of comonotonic risks.     

Asymptotics Beats Monte Carlo: The Case of Correlated Local Vol Baskets

We consider a basket of options with both positive and negative weights in the case where each asset has a smile, i.e., evolves according to its own local volatility and the driving Brownian motions are correlated. In the case of positive weights, the model has been considered in a previous work by Avellaneda, Boyer‐Olson, Busca, and Friz. We derive highly accurate analytic formulas for the prices and the implied volatilities of such baskets. The relative errors are of order 10^?4 (or better) for T=½, 10^?3 for T=2, and 10^?2 for T=10 (years). The computational time required to implement these formulas is under two seconds even in the case of a basket on 100 assets. The combination of accuracy and speed makes these formulas potentially attractive both for calibration and for pricing. In comparison, simulation‐based techniques are prohibitively slow in achieving a comparable degree of accuracy. Thus the present work opens up a new paradigm in which asymptotics may arguably be used for pricing as well as for calibration. © 2014 Wiley Periodicals, Inc.     

Arithmetic Brownian motion and real options

We treat real option value when the underlying process is arithmetic Brownian motion (ABM). In contrast to the more common assumption of geometric Brownian motion (GBM) and multiplicative diffusion, with ABM the underlying project value is expressed as an additive process. Its variance remains constant over time rather than rising or falling along with the project’s value, even admitting the possibility of negative values. This is a more compelling paradigm for projects that are managed as a component of overall firm value. After outlining the case for ABM, we derive analytical formulas for European calls and puts on dividend-paying assets as well as a numerical algorithm for American-style and other more complex options based on ABM. We also provide examples of their use.     

Static arbitrage bounds on basket option prices

We consider the problem of computing upper and lower bounds on the price of an European basket call option, given prices on other similar options. Although this problem is hard to solve exactly in the general case, we show that in some instances the upper and lower bounds can be computed via simple closed-form expressions, or linear programs. We also introduce an efficient linear programming relaxation of the general problem based on an integral transform interpretation of the call price function. We show that this relaxation is tight in some of the special cases examined before.     

Fractional Liu process with application to finance

As a fuzzy counterpart of Brownian motion, Liu process has attracted more and more attention in the recent literature. In this paper, the concept of fractional Liu process is proposed as an extension of Liu process. Furthermore, we obtain the expressions of the membership functions, expected values and variances of arithmetic and geometric fractional Liu processes for each fixed time. As an application, geometric fractional Liu process is assumed to characterize the stock price, which formulates a new fuzzy stock model. Based on this proposed model, European option pricing formulas are gained and two numerical examples are given with different parameters.     

A fuzzy extension of Analytic Hierarchy Process based on the constrained fuzzy arithmetic

The aim of the paper is to highlight the necessity of applying the concept of constrained fuzzy arithmetic instead of the concept of standard fuzzy arithmetic in a fuzzy extension of Analytic Hierarchy Process (AHP). Emphasis is put on preserving the reciprocity of pairwise comparisons during the computations. For deriving fuzzy weights from a fuzzy pairwise comparison matrix, we consider a fuzzy extension of the geometric mean method and simplify the formulas proposed by Enea and Piazza (Fuzzy Optim Decis Mak 3:39–62, 2004). As for the computation of the overall fuzzy weights of alternatives, we reveal the inappropriateness of applying the concept of standard fuzzy arithmetic and propose the proper formulas where the interactions among the fuzzy weights are taken into account. The advantage of our approach is elimination of the false increase of uncertainty of the overall fuzzy weights. Finally, we advocate the validity of the proposed fuzzy extension of AHP; we show by an illustrative example that by neglecting the information about uncertainty of intensity of preferences we lose an important part of knowledge about the decision making problem which can cause the change in ordering of alternatives.     

Analytical valuation of catastrophe equity options with negative exponential jumps

A catastrophe put option is valuable in the event that the underlying asset price is below the strike price; in addition, a specified catastrophic event must have happened and influenced the insured company. This paper analyzes the valuation of catastrophe put options under deterministic and stochastic interest rates when the underlying asset price is modeled through a Lévy process with finite activity. We provide explicit analytical formulas for evaluating values of catastrophe put options. The numerical examples illustrate how financial risks and catastrophic risks affect the prices of catastrophe put options.     

Comment on ‘Correcting for Simulation Bias in Monte Carlo Methods to Value Exotic Options in Models Driven by Lévy Processes’ by C. Ribeiro and N. Webber

Abstract

This paper proposes a pricing method for path-dependent derivatives with discrete monitoring when an underlying asset price is driven by a time-changed Lévy process. The key to our method is to derive a backward recurrence relation for computing the multivariate characteristic function of the intertemporal joint distribution of the time-changed Lévy process. Using the derived representation of the characteristic function, we obtain semi-analytical pricing formulas for geometric Asian, forward start, barrier, fader and lookback options, all of which are discretely monitored.     

Pricing long-dated insurance contracts with stochastic interest rates and stochastic volatility

We consider the pricing of long-dated insurance contracts under stochastic interest rates and stochastic volatility. In particular, we focus on the valuation of insurance options with long-term equity or foreign exchange exposures. Our modeling framework extends the stochastic volatility model of Schöbel and Zhu (1999) by including stochastic interest rates. Moreover, we allow all driving model factors to be instantaneously correlated with each other, i.e. we allow for a general correlation structure between the instantaneous interest rates, the volatilities and the underlying stock returns. As insurance products often incorporate long-term exposures, they are typically more sensitive to changes in the interest rates, volatility and currencies. Therefore, having the flexibility to correlate the underlying asset price with both the stochastic volatility and the stochastic interest rates, yields a realistic model which is of practical importance for the pricing and hedging of such long-term contracts. We show that European options, typically used for the calibration of the model to market prices, and forward starting options can be priced efficiently and in closed-form by means of Fourier inversion techniques. We extensively discuss the numerical implementation of these pricing formulas, allowing for a fast and accurate valuation of European and forward starting options. The model will be especially useful for the pricing and risk management of insurance contracts and other exotic derivatives involving long-term maturities.