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Abstract This paper studies a hedging problem of a contingent claim in a discrete time model. The contingent claim is hedged by one illiquid risky asset and the hedging error is measured by a quadratic criterion. In our model, trade does not always succeed and then trade times are not only...
Abstract We study the classical single factor term structure equation for models that predict non-negative interest rates. For these models we develop a fast and accurate finite difference method (FD) using the appropriate boundary conditions at zero.
Abstract We provide an accurate approximation method for inverting an option price to the implied volatility under arithmetic Brownian motion, which is widely quoted in Fixed Income markets. The maximum error in the volatility is in the order of 10−10 of the given option price and much smaller...
Abstract The CEV (constant elasticity of variance) and displaced diffusion processes have been posited as suitable alternatives to a lognormal process in modelling the dynamics of market variables such as stock prices and interest rates. Marris (1999) noted that, for a certain parameterization,...
Abstract This paper concerns the pricing of American options with stochastic stopping time constraints expressed in terms of the states of a Markov process. Following the ideas of Menaldi et al., we transform the constrained into an unconstrained optimal stopping problem. The transformation...
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