A transform approach to compute prices and Greeks of barrier options driven by a class of Lévy processes

By M. Jeannin, Martijn Pistorius. 2008

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In this paper we propose a transform method to compute the prices and Greeks of barrier options driven by a class of Lévy processes. We derive analytical expressions for the Laplace transforms in time of the prices and sensitivities of single barrier options in an exponential Lévy model with hyper-exponential jumps. Inversion of these single Laplace transforms yields rapid, accurate results. These results are employed to construct an approximation of the prices and sensitivities of barrier options in exponential generalized hyper-exponential Lévy models. The latter class includes many of the Lévy models employed in quantitative finance such as the variance gamma (VG), KoBoL, generalized hyperbolic, and the normal inverse Gaussian (NIG) models. Convergence of the approximating prices and sensitivities is proved. To provide a numerical illustration, this transform approach is compared with Monte Carlo simulation in cases where the driving process is a VG and a NIG Lévy process. Parameters are calibrated to Stoxx50E call options.

Subfields: Demography, Finance

View Paper: https://www.semanticscholar.org/paper/775e045b5d092ed1879f1a8f444b74b4a39c8a11

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Citations in the corpus

Meromorphic Lévy processes and their fluctuation identities. (2010, background): “We mention, in particular, the many cases of spectrally negative Lévy processes in [20, 33], hyper-exponential and generalized hyper-exponential Lévy processes [23], Lamperti-stable processes in [9, 10, 13], Hypergeometric processes in [30, 32], β-processes in [28] and θ -processes in [29].”