Volterra equation for pricing and hedging in a regime switching market

Artikel

It is known that the risk minimizing price of European options in Markovmodulated market satisfies a system of coupled PDE, known as generalized B-S-M PDE. In this paper, another system of equations, which can be categorized as a Volterra integral equations of second kind, are considered. It is shown that this system of integral equations has smooth solution and the solution solves the generalized B-S-M PDE. Apart from showing existence and uniqueness of the PDE, this IE representation helps to develop a new computational method. It enables to compute the European option price and corresponding optimal hedging strategy by using quadrature method.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Cogent Economics & Finance ; ISSN: 2332-2039 ; Volume: 2 ; Year: 2014 ; Issue: 1 ; Pages: 1-11 ; Abingdon: Taylor & Francis

Classification and Topics

• Classification: Wirtschaft
• Subject: Markov modulated market ; locally risk minimizing option price ; Black-Scholes-Merton equations ; Volterra equation ; quadrature method

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Goswami, Anindya ; Saini, Ravi Kant
• Event: Veröffentlichung
• (who): Taylor & Francis
• (where): Abingdon
• (when): 2014

Further information

• DOI: doi:10.1080/23322039.2014.939769
• Handle: http://hdl.handle.net/10419/147723
• Last update: 10.03.2025, 11:44 AM CET