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Valuation of boundary-linked assets

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URI: http://hdl.handle.net/10016/104
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wb045720.pdf (567.85 KB)
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2004-11
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This article studies the valuation of boundary-linked assets and their derivatives in continuous-time markets. Valuing boundary-linked assets requires the solution of a stochastic differential equation with boundary conditions, which, often, is not Markovian. We propose a wavelet-collocation algorithm for solving a Milstein approximation to the stochastic boundary problem. Its convergence properties are studied. Furthermore, we value boundary-linked derivatives using Malliavin calculus and Monte Carlo methods. We apply these ideas to value European call options of boundary-linked assets
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DEE - Working Papers. Business Economics. WB
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