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Power Function to Reset the Exchange Rate-based Pricing of Options

Author: ZhangHeng
Tutor: ChaiJun
School: East China Normal University
Course: Applied Mathematics
Keywords: power function martingale pricing methods optimization
CLC: F830.91
Type: Master's thesis
Year: 2009
Downloads: 71
Quote: 0
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Abstract


In 1973, in the assumptions of the effective market and stock price which meets the geometric Brownian motion, The U.S financial experts Black and Scholes used the hedging trading strategy to derive the famous Black-Scholes stock option pricing model, which laid the theoretical basis for the emerging market derivatives such as stocks, bonds, currencies, commodity which change prices in market value. In recent years, the international financial markets emerged a large number of options—Singular Options which changed, composed or derived from the standard options. The reset linked exchange rate option was a new type of financial derivatives which designed by Dr. Tian Cunzhi in the basis of European standard Black-Scholes option. This option can stabilize the stock market and protect investors, and especially draw the attraction of large firms. First in this paper the yield to maturity of reset linked exchange rate options is designed in the form of power function so as to minimize the effect of payment options; Then Martingale pricing methods is adopted to derive the precise formula for option prices, while numerical simulation method is used for verifying the power function’s capabilities of option price reduction and risk-hedging. This shows that the power function type options played a significant role in the reduction of payment options; Finally, starting from two angles, we discuss the optimization problem for the investors and the sales. We make the yield to maturity the proportion of the payment options, then use the matlab software to procure the optimized exponential for the options. The optimized exponential has great significance both for the investors and the sales. People can get the maximum gains as a reference to this optimized exponential.

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