CLOSED-FORM APPROXIMATION OF PERPETUAL TIMER OPTION PRICES

Minqiang Li and Fabio Mercurio ()
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Fabio Mercurio: Derivatives Research, Bloomberg LP. 731 Lexington Avenue, New York City, New York, 10022, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 04, 1-34

Abstract: We develop an asymptotic expansion technique for pricing timer options in stochastic volatility models when the effect of volatility of variance is small. Based on the pricing PDE, closed-form approximation formulas have been obtained. The approximation has an easy-to-understand Black–Scholes-like form and many other attractive properties. Numerical analysis shows that the approximation formulas are very fast and accurate, especially when the volatility of variance is not large.

Keywords: Timer options; perturbation; closed-form approximation; stochastic volatility; models; asymptotic expansion (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219024914500265

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