579 research outputs found

### The Pricing of Multiple-Expiry Exotics

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
$n$-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

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 $[0, \infty)$. 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

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 $n$ terms

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

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

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

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

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

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

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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