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arXiv · 1407.4864

An exact and explicit formula for pricing lookback options with regime switching

Leunglung Chan·Song-Ping Zhu
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Abstract

This paper investigates the pricing of European-style lookback options when the price dynamics of the underlying risky asset are assumed to follow a Markov-modulated Geo-metric Brownian motion; that is, the appreciation rate and the volatility of the underlying risky asset depend on unobservable states of the economy described by a continuous-time hidden Markov chain process. We derive an exact, explicit and closed-form solution for European-style lookback options in a two-state regime switching model.

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Leunglung Chan, Song-Ping Zhu. 2014-07-18. An exact and explicit formula for pricing lookback options with regime switching. https://arxiv.org/abs/1407.4864

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