Cliquet Options: Pricing and Greeks in Deterministic and Stochastic Volatility Models

Abstract

This paper presents a method to determine the price of a cliquet option, as well as its sensitivity to changes in the market, the Greeks, for deterministic (also incorporating skews) and stochastic (Hestonian) volatility and, lognormal and jump-diffusion asset price - processes, with almost machine precision in a fraction of a second. In the pricing algorithms we make use of a new Laplace transform inversion technique, which guarantees fast and numerically stable pricing. The computation of the Greeks is based on a Girsanov type drift adjustment.

Keywords: cliquet option, Hestonian, Girsanov, Greeks

JEL Classification: G13,C63