G-2017-61
Analytical valuation of compound options under regime switching dynamics
Michèle Breton and Mbaye Ndoye
We propose an analytical formula for the evaluation of compound options when the underlying asset is described by a two-states Markov regime-switching log-normal model. One specific application of interest of such a formula is the pricing of principal protected callable notes with an early redemption feature. This approach provides practitioners with a Black-Scholes-type formula under a realistic assumption about market prices behavior.
Published July 2017 , 13 pages