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Closed-form solutions for options with random initiation under asset price monitoring

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  • Jun, Doobae
  • Ku, Hyejin

Abstract

This paper studies derivatives to prepare for financial risk from unexpected events. It is difficult for firms and financial institutions to hedge losses triggered by natural catastrophes such as earthquakes, by using derivative securities with fixed initiation and maturities. In this context, we consider an option that is initiated at random by an unexpected event, and moreover, is connected with a barrier of knock-in or knock-out type for asset price monitoring until the time of event. We derive closed-form valuation formulas for these options.

Suggested Citation

  • Jun, Doobae & Ku, Hyejin, 2017. "Closed-form solutions for options with random initiation under asset price monitoring," Finance Research Letters, Elsevier, vol. 20(C), pages 68-74.
    • Handle: RePEc:eee:finlet:v:20:y:2017:i:c:p:68-74
    DOI: 10.1016/j.frl.2016.09.009
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    References listed on IDEAS

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    More about this item

    Keywords

    Option pricing; Random initiation; Barrier; Asset monitoring;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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