Abstract: The payoffs of path-dependent options depend not only on the final
values, but also on the sample paths of the prices of the underlying
assets. A rigorous modeling of the underlying asset price processes
which can appropriately describe the sample paths is therefore
critical for pricing path-dependent options. This paper allows for
discontinuities in the sample paths of the underlying asset prices by
assuming that these prices follow jump diffusion processes. A general
yet tractable approach is presented to value a variety of
path-dependent options with discontinuous processes. The numerical
examples show that ignoring the jump risk may lead to serious biases
in path-dependent option pricing.
Keywords: Path-dependent, option, jump diffusion
Full paper (218 KB PDF)
| Full paper (201 KB Postscript)
Home | Economic research and data | FR working papers | FEDS | 1997 FEDS papers
Accessibility
To comment on this site, please fill out our feedback form.
Last update: July 16, 1997
|