Document Type
Journal Article
Abstract
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. © 2012 Elsevier Ltd. All rights reserved.
RIS ID
67554
COinS
Publication Details
Zhu, S., Badran, A. & Lu, X. (2012). A new exact solution for pricing European options in a two-state regime-switching economy. Computers and Mathematics with Applications, 64 (8), 2744-2755.