Fusai, Gianluca (2000) Applications of Laplace transform for evaluating occupation time options and other derivatives. PhD thesis, University of Warwick.

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Abstract

The present thesis provides an analysis of possible applications of the Laplace Transform (LT) technique to several pricing problems. In Finance this technique has received very little attention and for this reason, in the first chapter we illustrate with several examples why the use of the LT can considerably simplify the pricing problem. Observed that the analytical inversion is very often difficult or requires the computation of very complicated expressions, we illustrate also how the numerical inversion is remarkably easy to understand and perform and can be done with high accuracy and at very low computational cost. In the second and third chapters we investigate the problem of pricing corridor derivatives, i.e. exotic contracts for which the payoff at maturity depends on the time of permanence of an index inside a band (corridor) or below a given level (hurdle). The index is usually an exchange or interest rate. This kind of bond has evidenced a good popularity in recent years as alternative instruments to common bonds for short term investment and as opportunity for investors believing in stable markets (corridor bonds) or in non appreciating markets (hurdle bonds). In the second chapter, assuming a Geometric Brownian dynamics for the underlying asset and solving the relevant Feynman-Kac equation, we obtain an expression for the Laplace transform of the characteristic function of the occupation time. We then show how to use a multidimensional numerical inversion for obtaining the density function. In the third chapter, we investigate the effect of discrete monitoring on the price of corridor derivatives and, as already observed in the literature for barrier options and for lookback options, we observe substantial differences between discrete and continuous monitoring. The pricing problem with discrete monitoring is based on an appropriate numerical scheme of the system of PDE's. In the fourth chapter we propose a new approximation for pricing Asian options based on the logarithmic moments of the price average.

Item Type:	Thesis or Dissertation (PhD)
Subjects:	H Social Sciences > HG Finance Q Science > QA Mathematics
Library of Congress Subject Headings (LCSH):	Laplace transformation, Derivative securities -- Mathematical models, Options (Finance) -- Mathematical models, Transformations (Mathematics)
Date:	October 2000
Institution:	University of Warwick
Theses Department:	Warwick Business School
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Hodges, S.
Sponsors:	University of Toronto ; Università di Firenze ; Università commerciale Luigi Bocconi
Format of File:	pdf
Extent:	355 leaves : charts
Language:	eng
URI:	http://wrap.warwick.ac.uk/id/eprint/2706

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