A Forward Started Jump-Diffusion Model and Pricing of Cliquet Style Exotics

Drimus, Gabriel G.

Abstract

References (18)

Citations (1)

Download This Paper | Share | Email |Add to Briefcase

A Forward Started Jump-Diffusion Model and Pricing of Cliquet Style Exotics

Gabriel G. Drimus

Institute of Banking and Finance, University of Zürich

October 30, 2008

Review of Derivatives Research, Vol. 13, No. 2, 2010

Abstract:
We present a two factor forward variance market model with jumps in returns and volatility. It allows the model user to directly control the behavior of future smiles and hence properly price forward smile risk of cliquet-style exotic products. The key idea, in order to achieve consistency between the dynamics of forward variance swaps and the underlying stock, is to adopt a forward starting model for the stock dynamics over each reset period of the tenor structure.

Number of Pages in PDF File: 17

Keywords: forward volatility smiles, forward skew, variance swaps, cliquets, exotic options

JEL Classification: G13

Accepted Paper Series

Download This Paper

Date posted: April 4, 2009 ; Last revised: December 21, 2010

Suggested Citation

Drimus, Gabriel G., A Forward Started Jump-Diffusion Model and Pricing of Cliquet Style Exotics (October 30, 2008). Review of Derivatives Research, Vol. 13, No. 2, 2010. Available at SSRN: http://ssrn.com/abstract=1373126

Contact Information

Gabriel G. Drimus (Contact Author)

Institute of Banking and Finance, University of Zürich ( email )

Plattenstrasse 14
Zürich, CH-8032
Switzerland