Abstract

http://ssrn.com/abstract=1612014
 
 

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Pricing Timer Options


Carole Bernard


University of Waterloo

Zhenyu Cui


Brooklyn College, CUNY

August 22, 2010

Journal of Computational Finance, Vol. 15, No. 1, 2011

Abstract:     
In this paper, we discuss a newly introduced exotic derivative called the “Timer Option”. Instead of being exercised at a fixed maturity date as a vanilla option, it has a random date of exercise linked to the accumulated variance of the underlying stock. Unlike common quadratic-variation-based derivatives, the price of a timer option generally depends on the assumptions on the underlying variance process and its correlation with the stock (unless the risk-free rate is equal to zero). In a general stochastic volatility model, we first show how the pricing of a timer call option can be reduced to a one-dimensional problem. We then propose a fast and accurate almost-exact simulation technique coupled with a powerful (model-free) control variate. Examples are derived in the Hull and White and in the Heston stochastic volatility models.

Number of Pages in PDF File: 37

Keywords: Stochastic volatility, Volatility derivative, timer option, quadratic variation, correlation, Heston model, Hull and White model.

JEL Classification: G12, G13

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Date posted: May 19, 2010 ; Last revised: January 24, 2012

Suggested Citation

Bernard, Carole and Cui, Zhenyu, Pricing Timer Options (August 22, 2010). Journal of Computational Finance, Vol. 15, No. 1, 2011. Available at SSRN: http://ssrn.com/abstract=1612014

Contact Information

Carole Bernard (Contact Author)
University of Waterloo ( email )
waterloo, Ontario N2L 3G1
Canada
Zhenyu Cui
Brooklyn College, CUNY ( email )
2900 Bedford Avenue
Brooklyn, NY 11210
United States
7189515246 (Phone)
HOME PAGE: http://https://sites.google.com/site/zhenyucui86/
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