Explicit solutions to European options in a regime-switching economy

Option pricing with regime switching by trinomial tree method

“…For the European option, Naik [5], Guo [8] and Elliott et al [9] provide an explicit price formula. Mamon and Rodrigo [10] obtain the explicit solution to European options in regime switching economy by considering the solution of a system of PDEs. All the close form solutions depend on the distribution of occupation time which is not easy to obtain.…”

Risk Minimizing Option Pricing in a Regime Switching Market

“…Note that in [7] the option price formula depends on the drift Downloaded by [Tufts University] at 12:55 18 November 2014 parameters of the stock price whereas our option price formula has no explicit dependence on the drift process. In [2,10], the entire dynamics is described under a risk neutral measure. In particular in [2] the drift X t of the stock process S t is different from the instantaneous interest r X t whereas in [10], it is assumed that X t = r X t .…”

“…In other words every contingent claim in such a market will have an intrinsic risk. The option pricing in a regime switching framework has been studied by several authors using different approaches [2,3,7,8,10,12,14]. In [5], Föllmer and Schweizer has addressed the option pricing in an incomplete market.…”

Optimal Hedging When the Underlying Asset Follows a Regime-Switching Markov Process

“…Hardy (2001) nds a closed-form formula for the price of European options. The continuous-time version of the Gaussian mixture model is studied by Mamon & Rodrigo (2005) who nd an explicit value for European options by solving a partial dierential equation. Elliott et al (2005) price derivatives by means of the Esscher transform under the same continuous-time model.…”