Pricing Of Bermudan Recovery Option And Simulation

Option is indispensable tool for risk management in global financial markets.Financial markets without option instruments cannot be called perfect financial markets.China has stepped into the "option era" with the Shanghai 50 ETF options listed on the Shanghai stock exchange in February 9,2015.In addition to the standardized options traded on the floor,exotic options are active in the over-the-counter market.It is reported that the Bermudan options are popular in the over-the-counter market of our country.Compared with the European option,the Bermudan option have multiple exercise dates,and the holder may exercise the option in any one,so it's favored by financial market participants.Standard form of Bermudan options,such as Bermudan call options,have been unable to meet the personalized demand for risk management of all kinds of financial market participants,library to contain more abundant Bermudan options species.To meet the demand for new types of options,this paper designed a kind of new exotic options,the asset can be sold at the price of several days before by the holder of this option.It is as if the underlying asset price is restored to a few days before,so this option is called recovery option.Recovery option is more cost-effective than look back option,and when its avoid foreseeable future short-term risk can reflect extremely excellent safety performance.So the more cost-effective Bermudan recovery options are put forward in this paper,considering the flexibility of option exercise,OTC market demand in China and option price,on the basis of summarizing the predecessors' research.Under the assumption that the price of the underlying asset is subject to the geometric Brownian motion,the European recovery option pricing formula is derived from the risk neutral pricing method.It is observed that the price of the European recovery option is not related to the remaining period before the recovery period,and it is reduced to the general European put option in the recovery period,based on this inference,the pricing formula of Bermudan recovery option is derived.Numerical simulation of Bermudan recovery options show that,the recovery option price is positively related to the underlying asset price with low volatility before recovery period,and it's reverse during the recovery period.At the same time,the time value of recovery option decay rapidly during the recovery period.The parameter sensitivity analysis of recovery option found that,price is low sensitive to interest rates,moderate to the volatility,high to the number of exercise dates and length of recovery period.Simulation results of the recovery options provide a theoretical reference to designers choosing parameters.