Pricing of First Touch Digitals Under Normal Inverse Gaussian Processes
23 Pages Posted: 25 Mar 2004
Date Written: February 11, 2004
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: Suggested Citation