Valuing power options under a regime-switching model

SU Xiao-nan; WANG Wei; WANG Wen-sheng

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Jan. 2014

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SU Xiao-nan, WANG Wei, WANG Wen-sheng. Valuing power options under a regime-switching model[J]. Journal of East China Normal University (Natural Sciences), 2013, (6): 32-39.

Citation:

SU Xiao-nan, WANG Wei, WANG Wen-sheng. Valuing power options under a regime-switching model[J]. Journal of East China Normal University (Natural Sciences), 2013, (6): 32-39.

SU Xiao-nan, WANG Wei, WANG Wen-sheng. Valuing power options under a regime-switching model[J]. Journal of East China Normal University (Natural Sciences), 2013, (6): 32-39.

Citation:

SU Xiao-nan, WANG Wei, WANG Wen-sheng. Valuing power options under a regime-switching model[J]. Journal of East China Normal University (Natural Sciences), 2013, (6): 32-39.

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Valuing power options under a regime-switching model

1.
School of Mathematics and Statistics, Nanjing Audit University, Nanjing 211815, China;
2.
Department of Mathematics, Ningbo University, Ningbo Zhejiang 31521, China;
3.
Department of Hangzhou Normal University, Hangzhou 310036, China

Received Date: 2013-01-01
Rev Recd Date: 2013-04-01
Publish Date: 2013-11-25

Abstract

Abstract

The pricing of European style power call options was considered when the dynamics of the underlying risky asset are driven by the Markov-modulated Geometric Brownian Motion. In particular, the market interest rate, the appreciation rate and the volatility of the underlying risky asset switched over time according to the sates of the continuous time Markov chain process. Since the market is incomplete, the regime switching Esscher transform was employed to determine an equivalent martingale measure and derive the valuation of the options. Then, the numerical analysis of our result was given.
- regime switching,
- power options,
- regime switching Esscher transform,
- option pricing,
- numerical analysis

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References(1)

References

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