Pricing of First Touch Digitals Under Normal Inverse Gaussian Processes

23 Pages Posted: 25 Mar 2004

See all articles by Oleg E. Kudryavtsev

Oleg E. Kudryavtsev

Russian Customs Academy Rostov Branch - Department of Informatics

Sergei Levendorskii

Calico Science Consulting

Date Written: February 11, 2004

Abstract

We calculate prices of first touch digitals under normal inverse Gaussian (NIG) processes, and compare them to prices in the Gaussian model with the same instantaneous variance. Numerical results are produced to show that for typical parameters values, the relative error of the Gaussian approximation to NIG-price can be several dozen percent if the spot price is at the distance 0.05-0.2 from the barrier (normalized to one). A fast approximate pricing formula under NIG is derived.

Keywords: First touch digitals, Levy processes, fast pricing

JEL Classification: C63, G12, G13

Suggested Citation

Kudryavtsev, Oleg E. and Levendorskii, Sergei Z., Pricing of First Touch Digitals Under Normal Inverse Gaussian Processes (February 11, 2004). Available at SSRN: https://ssrn.com/abstract=520045 or http://dx.doi.org/10.2139/ssrn.520045

Oleg E. Kudryavtsev

Russian Customs Academy Rostov Branch - Department of Informatics ( email )

Budennovskiy 20
Rostov-on-Don, 344011
Russia

Sergei Z. Levendorskii (Contact Author)

Calico Science Consulting ( email )

Austin, TX
United States

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