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Pricing power exchange options with correlated jump risk

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  • Wang, Xingchun

Abstract

This paper extends the framework of Blenman and Clark (2005) to value power exchange options by incorporating correlated jump risk. A typical class of jump-diffusion processes are used to describe the values of two risky assets, and a common jump process is introduced to allow for correlated jump risk. In this framework, I obtain an explicit pricing formula for power exchange options, and illustrate the effects of common jump risk as well as the difference between the impacts of idiosyncratic and common jump risk.

Suggested Citation

  • Wang, Xingchun, 2016. "Pricing power exchange options with correlated jump risk," Finance Research Letters, Elsevier, vol. 19(C), pages 90-97.
    • Handle: RePEc:eee:finlet:v:19:y:2016:i:c:p:90-97
    DOI: 10.1016/j.frl.2016.06.009
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Zhang, Wei-Guo & Li, Zhe & Liu, Yong-Jun, 2018. "Analytical pricing of geometric Asian power options on an underlying driven by a mixed fractional Brownian motion," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 490(C), pages 402-418.
    2. Liang Wang & Weixuan Xia, 2022. "Power‐type derivatives for rough volatility with jumps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(7), pages 1369-1406, July.
    3. Lloyd P. Blenman & Alberto Bueno-Guerrero & Steven P. Clark, 2022. "Pricing and Hedging Bond Power Exchange Options in a Stochastic String Term-Structure Model," Risks, MDPI, vol. 10(10), pages 1-17, September.
    4. Wang, Xingchun, 2020. "Pricing options on the maximum or minimum of multi-assets under jump-diffusion processes," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 16-26.
    5. Geonwoo Kim, 2020. "Valuation of Exchange Option with Credit Risk in a Hybrid Model," Mathematics, MDPI, vol. 8(11), pages 1-11, November.
    6. He, Chi-Wei & Chang, Kuang-Liang & Wang, Yung-Jang, 2020. "Does the jump risk in the US market matter for Japan and Hong Kong? An investigation on the REIT market," Finance Research Letters, Elsevier, vol. 34(C).
    7. Xin‐Jiang He & Sha Lin, 2023. "Analytically pricing exchange options with stochastic liquidity and regime switching," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(5), pages 662-676, May.
    8. Xu, Guangli & Shao, Xinjian & Wang, Xingchun, 2019. "Analytical valuation of power exchange options with default risk," Finance Research Letters, Elsevier, vol. 28(C), pages 265-274.
    9. Wang, Xingchun, 2016. "Pricing vulnerable options with stochastic default barriers," Finance Research Letters, Elsevier, vol. 19(C), pages 305-313.
    10. Afhami, Bahareh & Rezapour, Mohsen & Madadi, Mohsen & Maroufy, Vahed, 2023. "A comonotonic approximation to optimal terminal wealth under a multivariate Merton model with correlated jump risk," Applied Mathematics and Computation, Elsevier, vol. 444(C).

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    More about this item

    Keywords

    Power exchange options; Correlated jump risk; Jump-diffusion processes;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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