Option pricing techniques under stochastic delay models
McWilliams, Nairn Anthony
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The Black-Scholes model and corresponding option pricing formula has led to a wide and extensive industry, used by financial institutions and investors to speculate on market trends or to control their level of risk from other investments. From the formation of the Chicago Board Options Exchange in 1973, the nature of options contracts available today has grown dramatically from the single-date contracts considered by Black and Scholes (1973) to a wider and more exotic range of derivatives. These include American options, which can be exercised at any time up to maturity, as well as options based on the weighted sums of assets, such as the Asian and basket options which we consider. Moreover, the underlying models considered have also grown in number and in this work we are primarily motivated by the increasing interest in past-dependent asset pricing models, shown in recent years by market practitioners and prominent authors. These models provide a natural framework that considers past history and behaviour, as well as present information, in the determination of the future evolution of an underlying process. In our studies, we explore option pricing techniques for arithmetic Asian and basket options under a Stochastic Delay Differential Equation (SDDE) approach. We obtain explicit closed-form expressions for a number of lower and upper bounds before giving a practical, numerical analysis of our result. In addition, we also consider the properties of the approximate numerical integration methods used and state the conditions for which numerical stability and convergence can be achieved.