TY - JOUR
T1 - Pricing timer options
AU - Bernard, Carole
AU - Cui, Zhenyu
N1 - Publisher Copyright:
© 2011, Incisive Media Ltd. All rights reserved.
PY - 2011/9
Y1 - 2011/9
N2 - 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.
AB - 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.
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U2 - 10.21314/JCF.2011.228
DO - 10.21314/JCF.2011.228
M3 - Article
AN - SCOPUS:84973626823
SN - 1460-1559
VL - 15
SP - 69
EP - 104
JO - Journal of Computational Finance
JF - Journal of Computational Finance
IS - 1
ER -