Parisian options with jumps: a maturity–excursion randomization approach

Marc Chesney and Nikola Vasiljević

Quantitative Finance, 2018, vol. 18, issue 11, 1887-1908

Abstract: This paper introduces an analytically tractable method for the pricing of European and American Parisian options in a flexible jump–diffusion model. Our contribution is threefold. First, using a double Laplace–Carson transform with respect to the option maturity and the Parisian (excursion) time, we obtain closed-form solutions for different types of Parisian contracts. Our approach allows us also to analytically disentangle contributions of the jump and diffusion components for Parisian options in the excursion region. Second, we provide numerical examples and quantify the impact of jumps on the option price and the Greeks. Finally, we study the non-monotonic effects of volatility and jump intensity close to the excursion barrier, which are important for shareholders’ investment policy decisions in a levered firm.

Date: 2018
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DOI: 10.1080/14697688.2018.1444785

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