Option Pricing: Channels, Target Zones and Sideways Markets

Bulletin of Applied Economics 7(2) 25-33, 2020

11 Pages Posted: 2 Jun 2020

See all articles by Zura Kakushadze

Zura Kakushadze

Quantigic Solutions LLC; Free University of Tbilisi

Date Written: May 25, 2020

Abstract

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

Kakushadze, Zura, Option Pricing: Channels, Target Zones and Sideways Markets (May 25, 2020). Bulletin of Applied Economics 7(2) 25-33, 2020, Available at SSRN: https://ssrn.com/abstract=3610409 or http://dx.doi.org/10.2139/ssrn.3610409

Zura Kakushadze (Contact Author)

Quantigic Solutions LLC ( email )

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HOME PAGE: http://www.linkedin.com/in/zurakakushadze

Free University of Tbilisi ( email )

Business School and School of Physics
240, David Agmashenebeli Alley
Tbilisi, 0159
Georgia

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