579 research outputs found

    The Pricing of Multiple-Expiry Exotics

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    In this paper we extend Buchen's method to develop a new technique for pricing of some exotic options with several expiry dates(more than 3 expiry dates) using a concept of higher order binary option. At first we introduce the concept of higher order binary option and then provide the pricing formulae of nn-th order binaries using PDE method. After that, we apply them to pricing of some multiple-expiry exotic options such as Bermudan option, multi time extendable option, multi shout option and etc. Here, when calculating the price of concrete multiple-expiry exotic options, we do not try to get the formal solution to corresponding initial-boundary problem of the Black-Scholes equation, but explain how to express the expiry payoffs of the exotic options as a combination of the payoffs of some class of higher order binary options. Once the expiry payoffs are expressed as a linear combination of the payoffs of some class of higher order binary options, in order to avoid arbitrage, the exotic option prices are obtained by static replication with respect to this family of higher order binaries.Comment: 16 pages, 3 figures, Ver. 1 was presented in the 1st International Conference of Pyongyang University of Science & Technology, 5~6, Oct, 2011, in ver. 2 added proof, in ver. 3 revised and added some detail of proofs, Ver. 4,5: latex version, Ver. 6~8: corrected typos in EJMAA Vol.1(2)2013,247-25

    Explicit Representations of Green's Function for Linear Fractional Differential Operator with Variable Coefficients

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    We provide explicit representations of Green's functions for general linear fractional differential operators with {\it variable coefficients} and Riemann-Liouvilles derivatives. We assume that all their coefficients are continuous in [0,)[0, \infty). Using the explicit representations for Green's function, we obtain explicit representations for solution of inhomogeneous fractional differential equation with variable coefficients of general type. Therefore the method of Green's function, which was developed in previous research for solution of fractional differential equation with constant coefficients, is extended to the case of fractional differential equations with {\it variable coefficients}.Comment: 14 pages, version 4 is tex version and accepted to Journal of Fractional Calculus and Application

    Higher Order Binaries with Time Dependent Coefficients and Two Factors - Model for Defaultable Bond with Discrete Default Information

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    In this article, we consider a 2 factors-model for pricing defaultable bond with discrete default intensity and barrier where the 2 factors are stochastic risk free short rate process and firm value process. We assume that the default event occurs in an expected manner when the firm value reaches a given default barrier at predetermined discrete announcing dates or in an unexpected manner at the first jump time of a Poisson process with given default intensity given by a step function of time variable. Then our pricing model is given by a solving problem of several linear PDEs with variable coefficients and terminal value of binary type in every subinterval between the two adjacent announcing dates. Our main approach is to use higher order binaries. We first provide the pricing formulae of higher order binaries with time dependent coefficients and consider their integrals on the last expiry date variable. Then using the pricing formulae of higher binary options and their integrals, we give the pricing formulae of defaultable bonds in both cases of exogenous and endogenous default recoveries and credit spread analysis.Comment: 20 pages, 10 figures, corrected errors of ver.1, added the results on the case with endogenous default recovery and credit spread analysis with graphs. This version is a continued study and development of arXiv:1305.6988v4[q-fin.PR

    Existence and Solution-representation of IVP for LFDE with Generalized Riemann-Liouville fractional derivatives and nn terms

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    This paper provides the existence and representation of solution to an initial value problem for the general multi-term linear fractional differential equation with generalized Riemann-Liouville fractional derivatives and constant coefficients by using operational calculus of Mikusinski's type. We prove that the initial value problem has the solution of if and only if some initial values should be zero.Comment: 15 pages, ver 5 corrected 4 typos in ver 4; this version to appear in FCAA Vol.17, No.1, 2014 with the title "Operation Method for Solving Multi-Term Fractional Differential Equations with the Generalized Fractional Derivatives

    Numerical analysis for a unified 2 factor model of structural and reduced form types for corporate bonds with fixed discrete coupon

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    Conditions of Stability for explicit finite difference scheme and some results of numerical analysis for a unified 2 factor model of structural and reduced form types for corporate bonds with fixed discrete coupon are provided. It seems to be difficult to get solution formula for PDE model which generalizes Agliardi's structural model [1] for discrete coupon bonds into a unified 2 factor model of structural and reduced form types and we study a numerical analysis for it by explicit finite difference scheme. These equations are parabolic equations with 3 variables and they include mixed derivatives, so the explicit finite difference scheme is not stable in general. We find conditions for the explicit finite difference scheme to be stable, in the case that it is stable, numerically compute the price of the bond and analyze its credit spread and duration.Comment: 15 pages, 12 figure

    Representation of Solutions of Linear Homogeneous Caputo Fractional Differential Equations with Continuous Variable Coefficients

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    We consider the canonical fundamental systems of solutions of linear homogeneous Caputo fractional differential equations with continuous variable coefficients. Here we gained a series-representation of the canonical fundamental system by coefficients of the considered equations and the representation of solution to initial value problems using the canonical fundamental system. According to our results, the canonical fundamental system of solutions to linear homogeneous differential equation with Caputo fractional derivatives and continuous variable coefficients has different representations according to the distributions of the lowest order of the fractional derivatives in the equation and the distance from the highest order to its adjacent order of the fractional derivatives in the equation.Comment: 22 page

    Pricing Corporate Defaultable Bond using Declared Firm Value

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    We study the pricing problem for corporate defaultable bond from the viewpoint of the investors outside the firm that could not exactly know about the information of the firm. We consider the problem for pricing of corporate defaultable bond in the case when the firm value is only declared in some fixed discrete time and unexpected default intensity is determined by the declared firm value. Here we provide a partial differential equation model for such a defaultable bond and give its pricing formula. Our pricing model is derived to solving problems of partial differential equations with random constants (de- fault intensity) and terminal values of binary types. Our main method is to use the solving method of a partial differential equation with a random constant in every subinterval and to take expectation to remove the random constants.Comment: 12 pages, version 5 is written in tex and accepted in EJMAA(Electronic Journal of Mathematical Analysis and Applications

    The Binomial Tree Method and Explicit Difference Schemes for American Options with Time Dependent Coefficients

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    Binomial tree methods (BTM) and explicit difference schemes (EDS) for the variational inequality model of American options with time dependent coefficients are studied. When volatility is time dependent, it is not reasonable to assume that the dynamics of the underlying asset's price forms a binomial tree if a partition of time interval with equal parts is used. A time interval partition method that allows binomial tree dynamics of the underlying asset's price is provided. Conditions under which the prices of American option by BTM and EDS have the monotonic property on time variable are found. Using convergence of EDS for variational inequality model of American options to viscosity solution the decreasing property of the price of American put options and increasing property of the optimal exercise boundary on time variable are proved. First, put options are considered. Then the linear homogeneity and call-put symmetry of the price functions in the BTM and the EDS for the variational inequality model of American options with time dependent coefficients are studied and using them call options are studied.Comment: 39 pages, 4 figures; In this version, some new results for American call options are added in Sections 6,7 and

    Integrals of Higher Binary Options and Defaultable Bond with Discrete Default Information

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    In this article, we study the problem of pricing defaultable bond with discrete default intensity and barrier under constant risk free short rate using higher order binary options and their integrals. In our credit risk model, the risk free short rate is a constant and the default event occurs in an expected manner when the firm value reaches a given default barrier at predetermined discrete announcing dates or in an unexpected manner at the first jump time of a Poisson process with given default intensity given by a step function of time variable, respectively. We consider both endogenous and exogenous default recovery. Our pricing problem is derived to a solving problem of inhomogeneous or homogeneous Black-Scholes PDEs with different coefficients and terminal value of binary type in every subinterval between the two adjacent announcing dates. In order to deal with the difference of coefficients in subintervals we use a relation between prices of higher order binaries with different coefficients. In our model, due to the inhomogenous term related to endogenous recovery, our pricing formulae are represented by not only the prices of higher binary options but also the integrals of them. So we consider a special binary option called integral of i-th binary or nothing and then we obtain the pricing formulae of our defaultable corporate bond by using the pricing formulae of higher binary options and integrals of them.Comment: 27 pages, 18 figures; ver 5 writen in laTex and corrected typos in previous versions. arXiv admin note: substantial text overlap with arXiv:1305.686

    Analysis on the Pricing model for a Discrete Coupon Bond with Early redemption provision by the Structural Approach

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    In this paper, using the structural approach is derived a mathematical model of the discrete coupon bond with the provision that allow the holder to demand early redemption at any coupon dates prior to the maturity and based on this model is provided some analysis including min-max and gradient estimates of the bond price. Using these estimates the existence and uniqueness of the default boundaries and some relationships between the design parameters of the discrete coupon bond with early redemption provision are described. Then under some assumptions the existence and uniqueness of the early redemption boundaries is proved and the analytic formula of the bond price is provided using higher binary options. Finally for our bond is provided the analysis on the duration and credit spread, which are used widely in financial reality. Our works provide a design guide of the discrete coupon bond with the early redemption provisionComment: 30 pages, 16 figure
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