Computation of powered option prices under a general model for underlying asset dynamics

Jerim Kim, Bara Kim, Jeongsim Kim, Sungji Lee

Research output: Contribution to journalArticlepeer-review

Abstract

We derive the Laplace transforms for the prices and deltas of the powered call and put options, as well as for the price and delta of the capped powered call option under a general framework. These Laplace transforms are expressed in terms of the transform of the underlying asset price at maturity. For any model that can derive the transform of the underlying asset price, we can obtain the Laplace transforms for the prices and deltas of the powered options and the capped powered call option. The prices and deltas of the powered options and the capped powered call option can be computed by numerical inversion of the Laplace transforms. Models to which our method can be applied include the geometric Lévy model, the regime-switching model, the Black–Scholes–Vasiček model, and Heston's stochastic volatility model, which are commonly used for pricing of financial derivatives. In this paper, numerical examples are presented for all four models.

Original languageEnglish
Article number113999
JournalJournal of Computational and Applied Mathematics
Volume406
DOIs
Publication statusPublished - 2022 May 1

Bibliographical note

Funding Information:
We are grateful to the reviewers for their valuable comments and suggestions. This work was supported under the framework of international cooperation program managed by the National Research Foundation of Korea ( 2019K2A9A1A06102882 , FY2019)

Publisher Copyright:
© 2021 Elsevier B.V.

Keywords

  • Black–Scholes–Vasiček model
  • Geometric Lévy model
  • Heston's stochastic volatility model
  • Powered options
  • Regime-switching model

ASJC Scopus subject areas

  • Computational Mathematics
  • Applied Mathematics

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