Cliquet option pricing in a jump-diffusion Lévy model
Volume 5, Issue 3 (2018), pp. 317–336
Pub. online: 20 July 2018
Type: Research Article
Open Access
Open Access
Received
5 April 2018
5 April 2018
Revised
14 June 2018
14 June 2018
Accepted
23 June 2018
23 June 2018
Published
20 July 2018
20 July 2018
Abstract
We investigate the pricing of cliquet options in a jump-diffusion model. The considered option is of monthly sum cap style while the underlying stock price model is driven by a drifted Lévy process entailing a Brownian diffusion component as well as compound Poisson jumps. We also derive representations for the density and distribution function of the emerging Lévy process. In this setting, we infer semi-analytic expressions for the cliquet option price by two different approaches. The first one involves the probability distribution function of the driving Lévy process whereas the second draws upon Fourier transform techniques. With view on sensitivity analysis and hedging purposes, we eventually deduce representations for several Greeks while putting emphasis on the Vega.
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