Pricing European option price in jump-diffusion model / Anisah Abdul Rahman, Siti Salihah Shaffie and Nadzri Mohamad

Abdul Rahman, Anisah and Shaffie, Siti Salihah and Mohamad, Nadzri (2012) Pricing European option price in jump-diffusion model / Anisah Abdul Rahman, Siti Salihah Shaffie and Nadzri Mohamad. In: 1st International Conference on Innovation and Technology for Sustainable Built Environment 2012 (ICITSBE 2012), 16-17 April 2012, Universiti Teknologi MARA Cawangan Perak.

Abstract

This research presents a numerical method for pricing European options. The method is based on the jump diffusion process. The Merton’s jump-diffusion model has become a popular model among researchers. The
problem of pricing options with Black-Scholes framework remains a contemporary research topic. The Merton
model extends the Black-Scholes model making iteasy to produce an analytical solution for a variety of option
pricing problems. According to Peter Car, jump-diffusion has become a popular model being used by the
researchers because it is better able to fit smile volatility. There exists a consistent theoretical framework enabling experimentations with adapting the stock hedge or hedging with option.In essence, the Merton model
can be applied directly, given a slight reinterpretation of the parameters of the model. The reinterpretation
requires that we substitute the stock index value, for the stock price in the Merton’s model. We also substitute
the dividend rate on stock index, which we presume to equal risk-free rate. With these substitutions, we can
apply the Merton’s model to price the options.

Metadata

Item Type: Conference or Workshop Item (Paper)
Creators:
Creators
Email / ID Num.
Abdul Rahman, Anisah
anisah372@perak.uitm.edu.my
Shaffie, Siti Salihah
sitis064@perak.uitm.edu.my
Mohamad, Nadzri
UNSPECIFIED
Subjects: H Social Sciences > HG Finance > General works. Financial institutions
H Social Sciences > HG Finance > Capital costs
H Social Sciences > HG Finance > Capital costs > Malaysia
H Social Sciences > HG Finance > Investment, capital formation, speculation
H Social Sciences > HG Finance > Financial leverage
H Social Sciences > HG Finance > Financial leverage > Malaysia
Divisions: Universiti Teknologi MARA, Perak > Seri Iskandar Campus
Event Title: 1st International Conference on Innovation and Technology for Sustainable Built Environment 2012 (ICITSBE 2012)
Event Dates: 16-17 April 2012
Page Range: pp. 817-814
Keywords: Jump-diffusion model, European options, Black-Scholes Model
Date: 2012
URI: https://ir.uitm.edu.my/id/eprint/43199
Edit Item
Edit Item

Download

[thumbnail of 43199.pdf] Text
43199.pdf

Download (390kB)

ID Number

43199

Indexing

Statistic

Statistic details