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Pricing Timer Options

Carole Bernard

Grenoble Ecole de Management

Zhenyu Cui

Stevens Institute of Technology

August 22, 2010

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

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: https://ssrn.com/abstract=1612014

Contact Information

Carole Bernard (Contact Author)
Grenoble Ecole de Management ( email )
12, rue Pierre Sémard
Grenoble Cedex, 38003
Zhenyu Cui
Stevens Institute of Technology ( email )
Financial Engineering Division, SSE
Castle Point in the Hudson
Hoboken, NJ 07030
United States
(201) 216-3726 (Phone)
HOME PAGE: http://https://sites.google.com/site/zhenyucui86/
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