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No abstract

Most contracts of barrier and lookback options specify discrete monitoring policies. However, unlike their continuous counterparts, discrete barrier and lookback options essentially have no analytical solution. For a broad class of models, including the classical Brownian model and jump-diffusion models, we show that the Laplace transforms of discrete barrier and lookback options can be obtained via a recursion involving only analytical formulae of standard European call and put options, thanks to Spitzer's formula. The Laplace transforms can be numerically inverted to get option prices fast and accurately. Furthermore, the same method can be used to compute the hedging parameters (the greeks) of these products.

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This study develops and empirically tests a simple market microstructure model to capture the main determinants of option bid-ask spread. The model is based on option market making costs (initial hedging, rebalancing, and order processing costs), and incorporates a reservation bid-ask spread that option market makers apply to protect themselves from scalpers. The model is tested on a sample of covered warrants, which are optionlike securities issued by banks, traded on the Italian Stock Exchange. The empirical analysis validates the model. The initial cost of setting up a delta neutral portfolio has been found to be an important I wish to thank an anonymous reviewer,