English, Article edition: PRICING OF FIRST TOUCH DIGITALS UNDER NORMAL INVERSE GAUSSIAN PROCESSES OLEG KUDRYAVTSEV; SERGEI LEVENDORSKIÇ

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Bookmark: http://trove.nla.gov.au/version/83318
Physical Description
  • article
Language
  • English

Edition details

Title
  • PRICING OF FIRST TOUCH DIGITALS UNDER NORMAL INVERSE GAUSSIAN PROCESSES
Author
  • OLEG KUDRYAVTSEV
  • SERGEI LEVENDORSKIÇ
Physical Description
  • article
Notes
  • We calculate prices of first touch digitals under normal inverse Gaussian (NIG) processes, and compare them to prices in the Brownian model and double exponential jump-diffusion model. Numerical results are produced to show that for typical parameters values, the relative error of the Brownian motion approximation to NIG price can be 2â3 dozen percent if the spot price is at the distance 0.05â0.2 from the barrier (normalized to one). A similar effect is observed for approximations by the double exponential jump-diffusion model, if the jump component of the approximation is significant. We show that two jump-diffusion processes can give approximately the same results for European options but essentially different results for first touch digitals and barrier options. A fast approximate pricing formula under NIG is derived.
  • First touch digitals, Normal Inverse Gaussian processes, jump-diffusions, Lévy processes, fast pricing
  • RePEc:wsi:ijtafx:v:09:y:2006:i:06:p:915-949
Language
  • English
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