Cliquet option pricing in a jump-diffusion L\'{e}vy model

Markus Hess

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Abstract: We investigate the pricing of cliquet options in a jump-diffusion model. The considered option is of monthly sum cap style while the underlying stock price model is driven by a drifted L\'{e}vy process entailing a Brownian diffusion component as well as compound Poisson jumps. We also derive representations for the density and distribution function of the emerging L\'{e}vy process. In this setting, we infer semi-analytic expressions for the cliquet option price by two different approaches. The first one involves the probability distribution function of the driving L\'{e}vy process whereas the second draws upon Fourier transform techniques. With view on sensitivity analysis and hedging purposes, we eventually deduce representations for several Greeks while putting emphasis on the Vega.

Date: 2018-10
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Published in Modern Stochastics: Theory and Applications 2018, Vol. 5, No. 3, 317-336

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