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A new exact solution for pricing European options in a two-state regime-switching economy

Journal Article


Abstract


  • In this study, we derive a new exact solution for pricing European options in a two-state regime-switching economy. Two coupled Black-Scholes partial differential equations (PDEs) under the regime switching are solved using the Fourier Transform method. A key feature of the newly-derived solution is its simplicity in the form of a single integral with a real integrand, which leads to great computational efficiency in comparison with other closed-form solutions previously presented in the literature. Numerical examples are provided to demonstrate some interesting results obtained from our pricing formula. © 2012 Elsevier Ltd. All rights reserved.

Publication Date


  • 2012

Citation


  • Zhu, S., Badran, A. & Lu, X. (2012). A new exact solution for pricing European options in a two-state regime-switching economy. Computers and Mathematics with Applications, 64 (8), 2744-2755.

Scopus Eid


  • 2-s2.0-84866741318

Ro Metadata Url


  • http://ro.uow.edu.au/infopapers/2210

Has Global Citation Frequency


Number Of Pages


  • 11

Start Page


  • 2744

End Page


  • 2755

Volume


  • 64

Issue


  • 8

Place Of Publication


  • United Kingdom

Abstract


  • In this study, we derive a new exact solution for pricing European options in a two-state regime-switching economy. Two coupled Black-Scholes partial differential equations (PDEs) under the regime switching are solved using the Fourier Transform method. A key feature of the newly-derived solution is its simplicity in the form of a single integral with a real integrand, which leads to great computational efficiency in comparison with other closed-form solutions previously presented in the literature. Numerical examples are provided to demonstrate some interesting results obtained from our pricing formula. © 2012 Elsevier Ltd. All rights reserved.

Publication Date


  • 2012

Citation


  • Zhu, S., Badran, A. & Lu, X. (2012). A new exact solution for pricing European options in a two-state regime-switching economy. Computers and Mathematics with Applications, 64 (8), 2744-2755.

Scopus Eid


  • 2-s2.0-84866741318

Ro Metadata Url


  • http://ro.uow.edu.au/infopapers/2210

Has Global Citation Frequency


Number Of Pages


  • 11

Start Page


  • 2744

End Page


  • 2755

Volume


  • 64

Issue


  • 8

Place Of Publication


  • United Kingdom