Abstract: The payoffs of pathdependent 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 pathdependent 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
pathdependent options with discontinuous processes. The numerical
examples show that ignoring the jump risk may lead to serious biases
in pathdependent option pricing.
Keywords: Pathdependent, option, jump diffusion
Full paper (218 KB PDF)
 Full paper (201 KB Postscript)
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Last update: July 16, 1997
