Pricing holder-extendable options in a stochastic volatility model with an Ornstein-Uhlenbeck process
Holder-extendable options are characterized by two maturity dates, which means the option can be exercised at either the expiration date or the extended maturity date. This paper develops a pricing framework for holder-extendable options which deals with the extended version of a stochastic volatili...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
| Published: |
Institute for Mathematical Research, Universiti Putra Malaysia
2017
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| Online Access: | http://psasir.upm.edu.my/id/eprint/51691/1/1.pdf |
| Summary: | Holder-extendable options are characterized by two maturity dates, which means the option can be exercised at either the expiration date or the extended maturity date. This paper develops a pricing framework for holder-extendable options which deals with the extended version of a stochastic volatility model with an Ornstein-Uhlenbeck (OU) process. The extended model allows correlation between volatility and asset returns. The method uses Fourier inversion techniques that does not require an initial guess of the characteristic functions. A closed-form pricing formula for holder-extendable options is derived for logarithmic asset price dynamics. |
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