A new exact solution for pricing European options in a two-state regime-switching economyFaculty of Informatics - Papers (Archive)
AbstractIn this study, we derive a new exact solution for pricing European options in a two-state regime-switching economy. Two coupled Black-Scholes partial differential equations (PDEs) under the regime switching are solved using the Fourier Transform method. A key feature of the newly-derived solution is its simplicity in the form of a single integral with a real integrand, which leads to great computational efficiency in comparison with other closed-form solutions previously presented in the literature. Numerical examples are provided to demonstrate some interesting results obtained from our pricing formula.
Citation InformationSong-Ping Zhu, Alexander Badran and Xiaoping Lu. "A new exact solution for pricing European options in a two-state regime-switching economy" (2012) p. 2744 - 2755
Available at: http://works.bepress.com/xlu/1/