The aim of this paper is to provide an assessment of alternative frameworks for the fair valuation of life insurance contracts with a predominant financial component, in terms of impact on the market consistent price of the contracts, the embedded options, and the capital requirements for the...

Vanilla (standard European) options are actively traded on many underlying asset classes, such as equities, commodities and foreign exchange (FX). The market quotes for these options are typically used by exotic options traders to calibrate the parameters of the (risk-neutral) stochastic process...

A new option pricing formula is presented that unifies several results of the existing literature on exotic option pricing under Lèvy processes and generates new valuation formulas within the Lévy framework. To demonstrate the flexibility of the method a few examples are given and the known...

The aim of this paper is to show that option prices in jump-diffusion models can be computed using meshless methods based on Radial Basis Function (RBF) interpolation instead of traditional mesh-based methods like Finite Differences (FDM) or Finite Elements (FEM). The RBF technique is...

We explicitly solve the pricing problem for perpetual American puts and calls, and provide an efficient semi-explicit pricing procedure for options with finite time horizon. Contrary to the standard approach, which uses the price process as a primitive, we model the price process as the expected...

As is well known, the classic Black­Scholes option pricing model assumes that returns follow Brownian motion. It is widely recognized that return processes differ from this benchmark in at least three important ways. First, asset prices jump, leading to non­normal return innovations. Second,...

We propose a model for stock price dynamics that explicitly incorporates random waiting times between trades, also known as duration, and show how option prices can be calculated using this model. We use ultra-high-frequency data for blue-chip companies to motivate a particular choice of...

We analyze the specifications of option pricing models based on time- changed Levy processes. We classify option pricing models based on the structure of the jump component in the underlying return process, the source of stochastic volatility, and the specification of the volatility process...

Option values are well-known to be the integral of a discounted transition density times a payoff function; this is just martingale pricing. It's usually done in 'S-space', where S is the terminal security price. But, for Levy processes the S-space transition densities are often very...

This article analyzes the specifications of option pricing models based on time-changed Levy processes. We classify option pricing models based on (i) the structure of the jump component in the underlying return process, (ii) the source of stochastic volatility, and (iii) the specification of...