Pricing and static hedging of American-style options under the jump to default extended CEV model

Abstract

This paper prices (and hedges) American-style options through the static hedge approach

Repeated Richardson extrapolation and static hedging of barrier options under the CEV model

“…6 For instance, Ballestra and Cecere (2015), Nunes (2009), and Ruas, Dias, and Nunes (2013) use the CEV model for pricing and hedging American-style options. Chung et al (2013aChung et al ( , 2013b, Dias, Nunes, and Ruas (2015), Nunes et al (2015), and Tsai (2014) use the CEV model for pricing and hedging barrier options.…”

Pricing and static hedging of European-style double barrier options under the jump to default extended CEV model

“…The financial model adopted for the analytical valuation of barrier options has been initially developed by Carr and Linetsky (2006) for valuing European-style standard options, and then used by Nunes (2009) and Ruas et al (2013) for pricing American-style standard options under the optimal stopping and SHP approaches, respectively. For the analysis to remain self-contained, the next two subsections provide, respectively, a brief summary of the JDCEV modelling architecture and the contractual features of onetouch knock-out and knock-in double barrier options.…”

“…Similar to Ruas et al (2013), we use the algorithm offered by Dias and Nunes (2013) for valuing the truncated p-th moments ξ ( p, y; v, λ).…”

“…Given the recent market practitioners' concerns of linking equity derivatives markets and credit markets, the newly analytically tractable solutions of such sensitivity measures should be useful for many traders as a descriptive statistic for measuring the time decay effect of a portfolio of equity and credit derivatives under this class of hybrid credit-equity models. Moreover, these new Greek measures allow us to complement the deltas (also known as hedge ratios) recently provided by Ruas et al (2013), also under the same JDCEV modelling framework.…”

Pricing American options under the constant elasticity of variance model: An extension of the method by Barone-Adesi and Whaley

“…In this paper, we consider the problem of pricing American options on an underlying described by the CEV model; in the literature, this topic has already been addressed in some works: Wong and Zhao [2008] and Zhao and Chang [2014] have proposed the use of enhanced finite difference schemes; Ruas et al [2013] and Chung et al [2013] have developed static-hedge approaches; Xu and Knessl [2011] and Nunes [2009] have reduced the problem to an integral equation and have established certain asymptotic properties of the American option price; Nunes [2009] have employed an optimal stopping procedure for solving a jump to diffusion extended CEV model; Wong and Zhao [2010] obtains a fast approximation of the early exercise boundary and of the American option price based on the Laplace-Carson transform and on a Gaussian quadrature formula ;Pun and Wong [2013] use an asymptotic series expansion to improve the approach by Wong and Zhao [2010], which turns out to be unstable and inefficient for certain set of parameter values; Zhao and Wong [2012] apply homotopy approximation techniques for pricing American options on underlying described by the CEV model and other diffusion processes.…”