The Pricing of Multiple-Expiry Exotics

Hyong-Chol O and Mun-Chol KiM

Papers from arXiv.org

Abstract: In this paper we extend Buchen's method to develop a new technique for pricing of some exotic options with several expiry dates(more than 3 expiry dates) using a concept of higher order binary option. At first we introduce the concept of higher order binary option and then provide the pricing formulae of $n$-th order binaries using PDE method. After that, we apply them to pricing of some multiple-expiry exotic options such as Bermudan option, multi time extendable option, multi shout option and etc. Here, when calculating the price of concrete multiple-expiry exotic options, we do not try to get the formal solution to corresponding initial-boundary problem of the Black-Scholes equation, but explain how to express the expiry payoffs of the exotic options as a combination of the payoffs of some class of higher order binary options. Once the expiry payoffs are expressed as a linear combination of the payoffs of some class of higher order binary options, in order to avoid arbitrage, the exotic option prices are obtained by static replication with respect to this family of higher order binaries.

Date: 2013-02, Revised 2013-08
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Citations: View citations in EconPapers (2)

Published in Electronic Journal of Mathematical Analysis and Applications, Vol.1, No.2, July 2013, pp.247-259

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1302.3319

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