Pricing turbo warrants under stochastic elasticity of variance. (July 2016)

• Record Type: Journal Article
• Authors: Yoon, Ji-Hun; Park, Chang-Rae
• Is Part Of: Chaos, solitons and fractals. Volume 88(2016)
• Page Start: 107
• Page End: 118
• Publication Date: 2016-07
• Subjects: Turbo warrant option -- Stochastic elasticity of variance -- Ornstein–Uhlenbeck process -- Multi-scale analysis; Chaotic behavior in systems -- Periodicals; Solitons -- Periodicals; Fractals -- Periodicals; Chaotic behavior in systems; Fractals; Solitons; Periodicals; 003.7
• DOI: 10.1016/j.chaos.2015.11.043
• Languages: English
• ISSNs: 0960-0779

Abstract

Abstract: We consider an extended constant elasticity of variance (CEV) model in which the elasticity follows a stochastic process driven by a fast mean-reverting Ornstein–Uhlenbeck process. Then, we use the proposed model to examine a turbo warrant option, which is a type of exotic option. Based on an asymptotic analysis, we derive the partial differential equation of the leading and the corrected terms, which we use to determine the analytic formula for the turbo warrant call option. The parameter analysis using the extended CEV model provides us with a better understanding of the price structure of a turbo warrant call. Moreover, by comparing the turbo warrant call with a European vanilla call, we can examine the sensitivity of options with respect to the model parameters.