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Pricing generalized capped exchange options

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  • Chou-Wen Wang
  • Szu-Lang Liao
  • Ting-Yi Wu

Abstract

The article makes two contributions to the literature. The first contribution is to derive a closed-form solution of Taiwanese capped options. We also provide the properties of Taiwanese capped options and the phenomenon of delta jump at monitoring dates. When the interest rate changes dramatically, instead of deriving the pricing formulas for derivatives separately, the second contribution is to provide the closed-form solution of generalized capped exchange options with stochastic barriers under the Hull and White framework. Special cases of generalized capped exchange options with stochastic barriers are abundant. They include capped (floored) options, capped (floored) options with exponential barriers, capped (floored) options with related assets or indices as triggers and capped (floored) options with related assets or indices as triggers and other related assets as barriers.

Suggested Citation

  • Chou-Wen Wang & Szu-Lang Liao & Ting-Yi Wu, 2008. "Pricing generalized capped exchange options," Applied Financial Economics, Taylor & Francis Journals, vol. 18(9), pages 765-776.
    • Handle: RePEc:taf:apfiec:v:18:y:2008:i:9:p:765-776
    DOI: 10.1080/09603100701222267
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    References listed on IDEAS

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    1. Stephen F. Gray & Robert E. Whaley, 1999. "Reset Put Options: Valuation, Risk Characteristics, and an Application," Australian Journal of Management, Australian School of Business, vol. 24(1), pages 1-20, June.
    2. Johnson, Herb, 1987. "Options on the Maximum or the Minimum of Several Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(3), pages 277-283, September.
    3. Hajivassiliou, Vassilis & McFadden, Daniel & Ruud, Paul, 1996. "Simulation of multivariate normal rectangle probabilities and their derivatives theoretical and computational results," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 85-134.
    4. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    5. Mark Broadie & Paul Glasserman & Steven Kou, 1997. "A Continuity Correction for Discrete Barrier Options," Mathematical Finance, Wiley Blackwell, vol. 7(4), pages 325-349, October.
    6. Vijverberg, Wim P. M., 1997. "Monte Carlo evaluation of multivariate normal probabilities," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 281-307.
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