Option Pricing: Channels, Target Zones and Sideways Markets
Bulletin of Applied Economics 7(2) 25-33, 2020
11 Pages Posted: 2 Jun 2020
Date Written: May 25, 2020
After a market downturn, especially in an uncertain economic environment such as the current state, there can be a relatively long period with a sideways market, where indexes, stocks, etc., move in channels with support and resistance levels. We discuss option pricing in such scenarios, in both cases of unattainable as well as attainable boundaries, and obtain closed-form option pricing formulas. Our results also apply to FX rates in target zones without interest rate pegging (USD/HKD, digital currencies, etc.).
Keywords: Option Pricing, Channel, Reflecting Boundaries, Brownian Motion, Volatility, Drift, Barriers, Mean-Reversion, Mean-Repelling, FX, Digital Currencies, Target Zone, Sideways Market, Interest Rate, Attainable Boundaries, Unattainable Boundaries
JEL Classification: G00, G10, G11, G12, G13, G20, G23, G24, G30, G32, C22, C25
Suggested Citation: Suggested Citation