Pricing timer options

Carole Bernard, Zhenyu Cui

Research output: Contribution to journalArticlepeer-review

24 Scopus citations

Abstract

In this paper a newly introduced exotic derivative called the “timer option” is discussed. Instead of being exercised at a fixed maturity date as a vanilla option, it has a random date of exercise linked to the realized variance of the underlying stock. Unlike common quadratic-variation-based derivatives, the price of a timer option generally depends on the assumptions on the underlying variance process and its correlation with the stock (unless the risk-free rate is equal to zero). In a general stochastic volatility model, we first show how the pricing of a timer call option can be reduced to a one-dimensional problem. We then propose a fast and accurate almost-exact simulation technique coupled with a powerful (model-free) control variate. Examples are derived in the Hull–White and the Heston stochastic volatility models.

Original languageEnglish
Pages (from-to)69-104
Number of pages36
JournalJournal of Computational Finance
Volume15
Issue number1
DOIs
StatePublished - Sep 2011

Fingerprint

Dive into the research topics of 'Pricing timer options'. Together they form a unique fingerprint.

Cite this