Journal of East China Normal University(Natural Sc ›› 2013, Vol. 2013 ›› Issue (6): 32-39.

• Article • Previous Articles     Next Articles

Valuing power options under a regime-switching model

SU Xiao-nan1, WANG Wei2, WANG Wen-sheng3   

  1. 1. School of Mathematics and Statistics, Nanjing Audit University, Nanjing 211815, China; 2. Department of Mathematics, Ningbo University, Ningbo Zhejiang 31521, China; 3. Department of Hangzhou Normal University, Hangzhou 310036, China
  • Received:2013-01-01 Revised:2013-04-01 Online:2013-11-25 Published:2014-01-13

Abstract: The pricing of European style power call options was
considered when the dynamics of the underlying risky asset are
driven by the Markov-modulated Geometric Brownian Motion. In
particular, the market interest rate, the appreciation rate and the
volatility of the underlying risky asset switched over time
according to the sates of the continuous time Markov chain process.
Since the market is incomplete, the regime switching Esscher
transform was employed to determine an equivalent martingale measure
and derive the valuation of the options. Then, the numerical
analysis of our result was given.

Key words: regime switching, power options, regime switching Esscher transform, option pricing, numerical analysis

CLC Number: