Valuing Qualitative Options With Stochastic Volatility

Quantitative Finance, Vol 9, Issue 7, 2009

Posted: 27 Nov 2007 Last revised: 22 Oct 2010

See all articles by Bong-Gyu Jang

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH)

Kum-Hwan Roh

Korea Advanced Institute of Science and Technology (KAIST), Department of Mathematical Science

Date Written: November 22, 2007

Abstract

We find a closed-form formula for valuing a time-switch option where its underlying asset is affected by a stochastically changing market environment, and apply it to the valuation of other qualitative options such as corridor options and options in foreign exchange markets. The stochastic market environment is modeled as a Markov regime-switching process. This analytic formula provides us a rapid and accurate scheme for valuing qualitative options with stochastic volatility.

Keywords: qualitative option, stochastic volatility, regime-switching volatility, option valuation, Markov chain

JEL Classification: C63

Suggested Citation

Jang, Bong-Gyu and Roh, Kum-Hwan, Valuing Qualitative Options With Stochastic Volatility (November 22, 2007). Quantitative Finance, Vol 9, Issue 7, 2009 . Available at SSRN: https://ssrn.com/abstract=968135

Bong-Gyu Jang (Contact Author)

Pohang University of Science and Technology (POSTECH) ( email )

77 Cheongam-ro
Pohang
Korea, Republic of (South Korea)

Kum-Hwan Roh

Korea Advanced Institute of Science and Technology (KAIST), Department of Mathematical Science ( email )

373-1 Kusong-dong
Yuson-gu
Taejon 305-701, 130-722
Korea, Republic of (South Korea)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,827
PlumX Metrics