English, Article edition: THE FORWARD PDE FOR EUROPEAN OPTIONS ON STOCKS WITH FIXED FRACTIONAL JUMPS PETER CARR; ALIREZA JAVAHERI

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Bookmark: http://trove.nla.gov.au/version/83303
Physical Description
  • article
Language
  • English

Edition details

Title
  • THE FORWARD PDE FOR EUROPEAN OPTIONS ON STOCKS WITH FIXED FRACTIONAL JUMPS
Author
  • PETER CARR
  • ALIREZA JAVAHERI
Physical Description
  • article
Notes
  • We derive a partial integro differential equation (PIDE) which relates the price of a calendar spread to the prices of butterfly spreads and the functions describing the evolution of the process. These evolution functions are the forward local variance rate and a new concept called the forward local default arrival rate. We then specialize to the case where the only jump which can occur reduces the underlying stock price by a fixed fraction of its pre-jump value. This is a standard assumption when valuing an option written on a stock which can default. We discuss novel strategies for calibrating to a term and strike structure of European options prices. In particular using a few calendar dates, we derive closed form expressions for both the local variance and the local default arrival rate.
  • Credit risk, default risk, forward equations, jump diffusion
  • RePEc:wsi:ijtafx:v:08:y:2005:i:02:p:239-253
Language
  • English
Contributed by
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