Path-Dependent Option Valuation When the Underlying Path is Discontinuous

21 Pages Posted: 11 Jun 1997

See all articles by Chunsheng Zhou

Chunsheng Zhou

Peking University - Guanghua School of Management - Finance

Abstract

The payoffs of path-dependent options depend not only on the nal values, but also on the sample paths of the prices of the underlying assets. A rigorous modeling of the under-lying asset price processes which can appropriately describe the sample paths is therefore critical for pricing path-dependent options. This paper allows for discontinuities in the sample paths of the underlying asset prices by assuming that these prices follow jump di usion processes. A general yet tractable approach is presented to value a variety of path-dependent options with discontinuous processes. The numerical examples show that ignoring the jump risk may lead to serious biases in path- dependent option pricing.

JEL Classification: G13

Suggested Citation

Zhou, Chunsheng, Path-Dependent Option Valuation When the Underlying Path is Discontinuous. Available at SSRN: https://ssrn.com/abstract=38220 or http://dx.doi.org/10.2139/ssrn.38220

Chunsheng Zhou (Contact Author)

Peking University - Guanghua School of Management - Finance ( email )

Beijing, 100871
China
8610-62768188 (Phone)
8610-62768266 (Fax)

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