This paper explains the losses (or errors) associated with pricing an American option in a multi-factor setting when using the true model but a suboptimal exercise strategy as a barrier option (a calibrated misspecified model, e.g., Black-Scholes). Pricing American options in a multi-factor...

Using both S&P 500 option and recently introduced VIX option prices, we study pricing kernels and their dependence on multiple volatility factors. We first propose nonparametric estimates of marginal pricing kernels, conditional on the VIX and the slope of the variance swap term structure. Our...

This paper derives an integrated reduced-form model to calculate the values of adjustable-rate leases with embedded cancellation, purchase, and default options. We also provide numerical examples showing that for a 30-year lease contract, the lessor offers a 15% discount in the initial rent, but...

With the innovation of derivatives, the Standard and Poor's (S&P) 500 index -- as an underlying asset of the volatility index (VIX) introduced by the Chicago Board Options Exchange (CBOE) -- was adopted as the research subject in this study. Since the financial crisis of 2008, the degree of...

This paper introduces a novel method to price arithmetic Asian options in Levy-driven models, with discrete and continuous averaging, by expanding on the approach of sequential characteristic function recovery. By utilizing frame duality and a FFT-based implementation of density projection, we...

In this paper, we consider hedging and pricing of illiquid options on an untradable underlying asset, where an alternative instrument is used as a hedging instrument. We assume that the trade price of the hedging instrument is subject to market impacts caused by the hedger, as well as the...

We embed systematic default, pro-cyclical recovery rates and habit persistence into a model with a slight possibility of a macroeconomic disaster of reasonable magnitude. We derive analytical solutions for defaultable bond prices and show that a single set of structural parameters calibrated to...

We develop approximate formulae expressed in terms of elementary functions for the density, the price and the Greeks of path dependent options of Asian style, in a general local volatility model. An algorithm for computing higher order approximations is provided. The proof is based on a heat...

In this paper we propose a closed-form pricing formula for European basket and spread options. Our approach is based on approximating the risk-neutral probability density function of the terminal value of the basket using a Gauss-Hermite series expansion around the Gaussian density. The new...

We derive a closed-form formula for the fair value of call and put options written on the arithmetic average of security prices driven by jump diffusion processes displaying (possibly periodical) trend, time varying volatility, and mean reversion. The model allows one for jointly fitting quoted...