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Option Pricing For Jump Diffusions: Approximations and Their Interpretation
Author(s) -
Mercurio Fabio,
Runggaldier Wolfgang J.
Publication year - 1993
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.1993.tb00087.x
Subject(s) - jump , jump diffusion , context (archaeology) , piecewise , mathematics , interpretation (philosophy) , constant (computer programming) , valuation of options , discrete time and continuous time , call option , approximations of π , diffusion , mathematical economics , econometrics , mathematical analysis , computer science , physics , statistics , paleontology , quantum mechanics , biology , programming language , thermodynamics
We derive a computable approximation for the value of a European call option when prices satisfy a jump‐diffusion model with the coefficients depending explicitly on time. This is achieved by approximating the original coefficients with functions that are piecewise constant in time. We give an interpretation of the approximating option values, in particular in the context of a discrete‐time model associated with the approximating continuous‐time model.