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G-2017-61

Analytical valuation of compound options under regime switching dynamics

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We propose an analytical formula for the evaluation of compound options when the underlying asset is described by a two-states Markov regime-switching log-normal model. One specific application of interest of such a formula is the pricing of principal protected callable notes with an early redemption feature. This approach provides practitioners with a Black-Scholes-type formula under a realistic assumption about market prices behavior.

, 13 pages

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