Multi-asset option pricing using an information-based model

Ikamari, Cynthia; Ngare, Philip; Weke, Patrick

doi:10.1016/j.sciaf.2020.e00564

Cited by 5 publications

(2 citation statements)

References 12 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…for a strike price K. The exact solution of Equation ( 7) for a European option is derived in [29] and given by the following closed-form formula…”

Section: Tmentioning

confidence: 99%

Numerical Approximation of Information-Based Model Equation for Bermudan Option with Variable Transaction Costs

Odin¹,

Jane²,

Cyprian³

2023

JMF

View full text Add to dashboard Cite

Non-linear partial differential equations have been increasingly used to model the price of options in the realistic market setting when transaction costs arising in the hedging of portfolios are taken into account. This paper focuses on finding the numerical solution of the non-linear partial differential equation corresponding to a Bermudan call option price with variable transaction costs for an asset under the information-based framework. The finite difference method is implemented to approximate the option price and its Greeks. Numerical examples are presented and the option prices compared to the closed-form solution of the information-based model and the Black Scholes model with zero transaction costs. The results show that the approximated option prices correspond to the analytical solution of the information-based model but are slightly higher than the prices under Black-Scholes model. These findings validate the finite difference method as an efficient way of approximating the information-based non-linear partial differential equation.

show abstract

“…for a strike price K. The exact solution of Equation ( 7) for a European option is derived in [29] and given by the following closed-form formula…”

Section: Tmentioning

confidence: 99%

Numerical Approximation of Information-Based Model Equation for Bermudan Option with Variable Transaction Costs

Odin¹,

Jane²,

Cyprian³

2023

JMF

View full text Add to dashboard Cite

show abstract

“…The approach also incorporates both deterministic and stochastic volatility when valuing contracts. The IBM has been majorly applied to value European-style contracts such as credit risky bonds under the assumption of market completeness with no transaction costs, see [3] [4] [5]. However, some extensions, for example in [6] [7] examine information inefficiency under the IBM that reflects an incomplete market setting.…”

Section: Introductionmentioning

confidence: 99%

Pricing Bermudan Option with Variable Transaction Costs under the Information-Based Model

Odin¹,

Aduda²,

Omari³

2022

OJS

View full text Add to dashboard Cite

The Bermudan option pricing problem with variable transaction costs is considered for a risky asset whose price process is derived under the information-based model. The price is formulated as the value function of an optimal stopping problem, which is the value function of a stochastic control problem given by a non-linear second order partial differential equation. The theory of viscosity solutions is applied to solve the stochastic control problem such that the value function is also the solution of the corresponding Bellman equation. Under some regularity assumptions, the existence and uniqueness of the solution of the pricing equation are derived by the application of the Perron method and Banach Fixed Point theorem.

show abstract

A solution to the multidimensionality in option pricing

Alghalith

Wong

2022

Communications in Statistics - Theory and Methods

View full text Add to dashboard Cite

Multi-asset option pricing using an information-based model

Cited by 5 publications

References 12 publications

Numerical Approximation of Information-Based Model Equation for Bermudan Option with Variable Transaction Costs

Numerical Approximation of Information-Based Model Equation for Bermudan Option with Variable Transaction Costs

Pricing Bermudan Option with Variable Transaction Costs under the Information-Based Model

A solution to the multidimensionality in option pricing

Contact Info

Product

Resources

About