Management Science and Financial Engineering

The Korean Operations Research and Management Science Society (한국경영과학회)
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Valuation of European and American Option Prices Under the Levy Processes with a Markov Chain Approximation

  • Han, Gyu-Sik (Division of Business Administration, Chonbuk National University)
  • Received : 2013.10.24
  • Accepted : 2013.10.28
  • Published : 2013.11.22
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Abstract

This paper suggests a numerical method for valuation of European and American options under the two L$\acute{e}$vy Processes, Normal Inverse Gaussian Model and the Variance Gamma model. The method is based on approximation of underlying asset price using a finite-state, time-homogeneous Markov chain. We examine the effectiveness of the proposed method with simulation results, which are compared with those from the existing numerical method, the lattice-based method.

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References

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