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Cliquet option pricing in a jump-diffusion L\'{e}vy model

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  • Markus Hess

Abstract

We investigate the pricing of cliquet options in a jump-diffusion model. The considered option is of monthly sum cap style while the underlying stock price model is driven by a drifted L\'{e}vy process entailing a Brownian diffusion component as well as compound Poisson jumps. We also derive representations for the density and distribution function of the emerging L\'{e}vy process. In this setting, we infer semi-analytic expressions for the cliquet option price by two different approaches. The first one involves the probability distribution function of the driving L\'{e}vy process whereas the second draws upon Fourier transform techniques. With view on sensitivity analysis and hedging purposes, we eventually deduce representations for several Greeks while putting emphasis on the Vega.

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  • Markus Hess, 2018. "Cliquet option pricing in a jump-diffusion L\'{e}vy model," Papers 1810.09670, arXiv.org.
    • Handle: RePEc:arx:papers:1810.09670
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    References listed on IDEAS

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    1. Ballotta, Laura, 2005. "A Lévy process-based framework for the fair valuation of participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 37(2), pages 173-196, October.
    2. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    3. Hieber, Peter, 2017. "Cliquet-style return guarantees in a regime switching Lévy model," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 138-147.
    4. Kassberger, Stefan & Kiesel, Rüdiger & Liebmann, Thomas, 2008. "Fair valuation of insurance contracts under Lévy process specifications," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 419-433, February.
    5. Markus Hess, 2018. "Cliquet option pricing with Meixner processes," Papers 1803.09444, arXiv.org.
    6. Cui, Zhenyu & Kirkby, J. Lars & Nguyen, Duy, 2017. "Equity-linked annuity pricing with cliquet-style guarantees in regime-switching and stochastic volatility models with jumps," Insurance: Mathematics and Economics, Elsevier, vol. 74(C), pages 46-62.
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