The Pricing of A Moving Barrier Option

We provided an analytical representation of the price of a barrier option with one type of special moving barrier. We consider the case that risk free rate, dividend rate and stock volatility are time dependent. We get a pricing formula and put call parity for barrier option when the moving barrier has a special relation with risk free rate, dividend rate and stock volatility.Comment: 11 pages, written in working paper series in 200

Analytical Pricing of Defaultable Bond with Stochastic Default Intensity

We provide analytical pricing formula of corporate defaultable bond with both expected and unexpected default in the case with stochastic default intensity. In the case with constant short rate and exogenous default recovery using PDE method, we gave some pricing formula of the defaultable bond under the conditions that 1)expected default recovery is the same with unexpected default recovery; 2) default intensity follows one of 3 special cases of Willmott model; 3) default intensity is uncorrelated with firm value. Then we derived a pricing formula of a credit default swap. And in the case of stochastic short rate and exogenous default recovery using PDE method, we gave some pricing formula of the defaultable bond under the conditions that 1) expected default recovery is the same with unexpected default recovery; 2) the short rate follows Vasicek model; 3) default intensity follows one of 3 special cases of Willmott model; 4) default intensity is uncorrelated with firm value; 5) default intensity is uncorrelated with short rate. Then we derived a pricing formula of a credit default swap. We give some credit spread analysis, too.Comment: 35 pages, 6 figures; written in working paper series in 2005, version 3 added references with crossref and revised introductio

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

Variational inequality for perpetual American option price and convergence to the solution of the difference equation

A variational inequality for pricing the perpetual American option and the corresponding difference equation are considered. First, the maximum principle and uniqueness of the solution to variational inequality for pricing the perpetual American option are proved. Then the maximum principle, the existence and uniqueness of the solution to the difference equation corresponding to the variational inequality for pricing the perpetual American option and the solution representation are provided and the fact that the solution to the difference equation converges to the viscosity solution to the variational inequality is proved. It is shown that the limits of the prices of variational inequality and BTM models for American Option when the maturity goes to infinity do not depend on time and they become the prices of the perpetual American option.Comment: 23 page

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

A Method of Reducing Dimension of Space Variables in Multi-dimensional Black-Scholes Equations

We study a method of reducing space dimension in multi-dimensional Black-Scholes partial differential equations as well as in multi-dimensional parabolic equations. We prove that a multiplicative transformation of space variables in the Black-Scholes partial differential equation reserves the form of Black-Scholes partial differential equation and reduces the space dimension. We show that this transformation can reduce the number of sources of risks by two or more in some cases by giving remarks and several examples of financial pricing problems. We also present that the invariance of the form of Black-Scholes equations is based on the invariance of the form of parabolic equation under a change of variables with the linear combination of variables.Comment: 14 page

Equiaffine Structure and Conjugate Ricci-symmetry of a Statistical Manifold

A condition for a statistical manifold to have an equiaffine structure is studied. The facts that dual flatness and conjugate symmetry of a statistical manifold are sufficient conditions for a statistical manifold to have an equiaffine structure were obtained in [2] and [3]. In this paper, a fact that a statistical manifold, which is conjugate Ricci-symmetric, has an equiaffine structure is given, where conjugate Ricci-symmetry is weaker condition than conjugate symmetry. A condition for conjugate symmetry and conjugate Ricci-symmetry to coincide is also given.Comment: 7 page

A construction of fractal surfaces with function scaling factors on a rectangular grid

A fractal surface is a set which is a graph of a bivariate continuous function. In the construction of fractal surfaces using IFS, vertical scaling factors in IFS are important one which characterizes a fractal feature of surfaces constructed. We construct IFS with function vertical scaling factors which are 0 on the boundaries of a rectangular grid using arbitrary data set on a rectangular grid and give a condition for an attractor of the IFS constructed being a surface. Finally, lower and upper bounds of Box-counting dimension of the constructed surface are estimated.Comment: 9 pages, 2 figure

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

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