Explicit solutions to European options in a regime-switching economy
We provide closed-form solutions for European option values when the dynamics of both the short rate and volatility of the underlying price process are modulated by a continuous-time Markov chain with a finite number of "economic states". Extensions involving dividends, currencies and cost of carry are further explored.
Mamon, R. S. & Rodrigo, M. R. (2005). Explicit solutions to European options in a regime-switching economy. Operations Research Letters, 33 (6), 581-586.