Valuation of boundary-linked assets
Jose Vidal-Sanz and
Mercedes Esteban-Bravo ()
DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa
This article studies the valuation of boundary-linked assets and their derivatives in continuous-time markets. Valuing boundary-linked assets requires the solution of a stochastic differential equation with boundary conditions, which, often, is not Markovian. We propose a wavelet-collocation algorithm for solving a Milstein approximation to the stochastic boundary problem. Its convergence properties are studied. Furthermore, we value boundary-linked derivatives using Malliavin calculus and Monte Carlo methods. We apply these ideas to value European call options of boundary-linked assets
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Persistent link: https://EconPapers.repec.org/RePEc:cte:wbrepe:wb045720
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