A new exact solution for pricing European options in a two-state regime-switching economy

作者：Zhu, Song-Ping^*; Badran, Alexander; Lu, Xiaoping

来源：Computers & Mathematics with Applications, 2012, 64(8): 2744-2755.

DOI：10.1016/j.camwa.2012.08.005

• Regime switching
• European options
• Fourier transform
• Fourier inversion
• Black-Scholes model

In 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.

• 出版日期2012-10
• 单位吉林大学