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Explicit Option Pricing Formula for A Mean-Reverting Asset

Explicit Option Pricing Formula for A Mean-Reverting Asset. Anatoliy Swishchuk “Lunch at the Lab” Talk March 10, 2005. Outline. Mean-Reverting Asset Model (MRAM) Explicit Solution for MRAM Explicit Option Pricing Formula for European Call Option under Physical Measure

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Explicit Option Pricing Formula for A Mean-Reverting Asset

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  1. Explicit Option Pricing Formula for A Mean-Reverting Asset Anatoliy Swishchuk “Lunch at the Lab” Talk March 10, 2005

  2. Outline • Mean-Reverting Asset Model (MRAM) • Explicit Solution for MRAM • Explicit Option Pricing Formula for European Call Option under Physical Measure • Mean-Reverting Risk-Neutral Asset Model (MRRNAM) • Explicit Solution for MRRNAM • Explicit Option Pricing Formula for European Call Option under Risk-Neutral Measure • Numerical Example: AECO Natural Gas Index (1/05/98-30/04/99)

  3. Mean-Reverting Asset Model (MRAM)

  4. Explicit Solution for MRAM

  5. Idea: Change of Time. I.

  6. Idea: Change of Time. II.

  7. Properties of the Process

  8. Properties of Mean-Reverting Asset

  9. Explicit Option Pricing Formula for European Call Option under Physical Measure

  10. Parameters:

  11. Mean-Reverting Risk-Neutral Asset Model (MRRNAM)

  12. Transformations:

  13. Explicit Solution for MRRNAM

  14. Properties of the Process

  15. Properties of MRRNAM

  16. Explicit Option Pricing Formula for European Call Option under Risk-Neutral Measure

  17. Numerical Example: AECO Natural Gas Index (1 May 1998-30 April 1999)

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