Closed-End Formula for options linked to Target Volatility Strategies

Luca Di Persio, Luca Prezioso and Kai Wallbaum

Papers from arXiv.org

Abstract: Recent years have seen an emerging class of structured financial products based on options linked to dynamic asset allocation strategies. One of the most chosen approach is the so-called target volatility mechanism. It shifts between risky and riskless assets to control the volatility of the overall portfolio. Even if a series of articles have been already devoted to the analysis of options linked to the target volatility mechanism, this paper is the first, to the best of our knowledge, that tries to develop closed-end formulas for VolTarget options. In particular, we develop closed-end formulas for option prices and some key hedging parameters within a Black and Scholes setting, assuming the underlying follows a target volatility mechanism.

Date: 2019-02
New Economics Papers: this item is included in nep-rmg
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