Ghosh, Mrinal K and Goswami, Anindya (2009) Risk Minimizing Option Pricing in a Semi-Markov Modulated Market. In: SIAM Journal on Control and Optimization, 48 (3). pp. 1519-1541.
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Abstract
We address risk minimizing option pricing in a semi-Markov modulated market where the floating interest rate depends on a finite state semi-Markov process. The growth rate and the volatility of the stock also depend on the semi-Markov process. Using the Föllmer–Schweizer decomposition we find the locally risk minimizing price for European options and the corresponding hedging strategy. We develop suitable numerical methods for computing option prices.
| Item Type: | Journal Article |
|---|---|
| Publication: | SIAM Journal on Control and Optimization |
| Publisher: | SIAM Publications |
| Additional Information: | Copyright for this article belongs to SIAM Publications. |
| Keywords: | semi-Markov modulated market; minimal martingale measure; locally risk minimizing option price; Black-Scholes equations |
| Department/Centre: | Division of Physical & Mathematical Sciences > Mathematics |
| Date Deposited: | 31 Dec 2009 09:43 |
| Last Modified: | 31 Dec 2009 09:43 |
| URI: | http://eprints.iisc.ac.in/id/eprint/21631 |
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