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Option Pricing and CVaR Hedging in the Regime-Switching Telegraph Market Model

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Modern Problems in Insurance Mathematics

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Abstract

The present chapter focuses on the two-state telegraph market model which is a particular case of a complete regime-switching market model featuring jump dynamics of the risky asset price process. We present explicit solutions for the problems of option pricing and CVaR-optimal partial hedging in the framework of the two-state telegraph market model and illustrate the derivation of the CVaR-optimal hedging strategy numerically.

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References

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Acknowledgments

This research was supported by the Natural Sciences and Engineering Council of Canada under grant NSERC 261855. The authors are grateful to Alexey Kuznetsov (e-mail: kuznetsov@mathstat.yorku.ca) for fruitful discussions of the results presented in this chapter.

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Authors and Affiliations

  1. University of Alberta, Edmonton, Canada

    Alexander Melnikov & Ivan Smirnov

Authors
  1. Alexander Melnikov
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  2. Ivan Smirnov
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Correspondence to Alexander Melnikov .

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Editors and Affiliations

  1. Department of Mathematics Professor of Mathematical Statistics, Stockholm University, Stockholm, Sweden

    Dmitrii Silvestrov

  2. Department of Mathematics Professor in Mathematical Statistics, Stockholm University, Stockholm, Sweden

    Anders Martin-Löf

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Melnikov, A., Smirnov, I. (2014). Option Pricing and CVaR Hedging in the Regime-Switching Telegraph Market Model. In: Silvestrov, D., Martin-Löf, A. (eds) Modern Problems in Insurance Mathematics. EAA Series. Springer, Cham. https://doi.org/10.1007/978-3-319-06653-0_21

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