Numerical Methods and Volatility Models for Valuing Cliquet Options

H. A. Windcliff, P. A. Forsyth and K. R. Vetzal

Applied Mathematical Finance, 2006, vol. 13, issue 4, 353-386

Abstract: Several numerical issues for valuing cliquet options using PDE methods are investigated. The use of a running sum of returns formulation is compared to an average return formulation. Methods for grid construction, interpolation of jump conditions, and application of boundary conditions are compared. The effect of various volatility modelling assumptions on the value of cliquet options is also studied. Numerical results are reported for jump diffusion models, calibrated volatility surface models, and uncertain volatility models.

Keywords: Cliquet options; jump diffusion; interpolation; boundary conditions; volatility models (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1080/13504860600839964

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