As is known, an option price is a solution to a certain partial differential equation (PDE) with terminal conditions (payoff functions). There is a close association between the solution of PDE and the solution of a backward stochastic differential equation (BSDE). We can either solve the PDE to...

This paper demonstrates that it is possible to improve significantly on the estimated call prices obtained with the regression and simulation based Least-Squares Monte-Carlo method of Longstaff & Schwartz (2001) by using put-call symmetry. Results show that the symmetric method performs much...

This paper examines empirically the value of early exercise by testing the ability of two American put valuation models to predict the early exercise premium for the S&P 100 American put options. An accuracy test and a quality test are performed on (1) the MacMillan, Barone-Adesi and Whaley...

This paper analyzes the importance of asset and volatility jumps in American option pricing models. Using the Heston (1993) stochastic volatility model with asset and volatility jumps and the Hull and White (1987) short rate model, American options are numerically evaluated by the Method of...

Our results suggest, selling SPY strangles are generally profitable across a variety of widths. However, the payoff profile of a short option strangle exposes the contract seller to a potential for unlimited losses. Our evidence on maximum draw-downs indicates that losses on some positions can...

This paper establishes the second-order convergence rates of the continuous-time Markov chain (CTMC) approximation method for pricing continuously monitored occupation time derivatives (step options, conditional Asian options) and arithmetic Asian options and their Greeks. We fill the gap in the...

In informationally efficient financial markets, option prices and this implied volatility should immediately be adjusted to new information that arrives along with a jump in underlying's return, whereas gradual changes in implied volatility would indicate market inefficiency. Using...

We present a novel and flexible technique for the construction of tractable, and fully arbitrage-free, Local-Stochastic Volatility (LSV) term distribution models. The method utilizes Lamperti's harmonic transform to combine a pure stochastic volatility (SV) process MT with a general local...

We analyze model risk for the pricing of barrier options. In contrast to existing literature, this paper is based on an empirical data set of over 40,000 bonus certificates to analyze the real market extent of model risk for traded barrier options instead of purely synthetic options. For this...

The stochastic alpha beta rho (SABR) model introduced by Hagan et al. (2002) is widely used in both fixed income and the foreign exchange (FX) markets. Continuously monitored barrier option contracts are among the most popular derivative contracts in the FX markets. In this paper, we develop...