Option Pricing For Jump Diffusions: Approximations and Their Interpretation

Fabio Mercurio and Wolfgang J. Runggaldier

Mathematical Finance, 1993, vol. 3, issue 2, 191-200

Abstract: We derive a computable approximation for the value of a European call option when prices satisfy a jump‐diffusion model with the coefficients depending explicitly on time. This is achieved by approximating the original coefficients with functions that are piecewise constant in time. We give an interpretation of the approximating option values, in particular in the context of a discrete‐time model associated with the approximating continuous‐time model.

Date: 1993
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