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Volume 17,     Number 4,     Winter 2009

 

PRICING TIMER OPTIONS UNDER FAST
MEAN-REVERTING STOCHASTIC VOLATILITY
DAVID SAUNDERS

Abstract. Timer options are derivative securities whose expiration date is random, depending on the realized volatility of the underlying asset. In this paper, we consider the pricing of timer options in a stochastic volatility model, where the volatility of the underlying asset follows an ergodic diffusion process, running on a fast time scale. An asymptotic approximation to the option price is derived, and numerical examples are provided to assess its accuracy.

 

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