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Closed-Form Approximation of Timer Option Prices under General Stochastic Volatility Models

Li, Minqiang and Mercurio, Fabio (2013): Closed-Form Approximation of Timer Option Prices under General Stochastic Volatility Models.

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Abstract

We develop an asymptotic expansion technique for pricing timer options under general stochastic volatility models around small volatility of variance. Closed-form approximation formulas have been obtained for the Heston model and the 3/2-model. The approximation has an easy-to-understand Black-Scholes-like form and many other attractive properties. Numerical analysis shows that the approximation formulas are very fast and accurate.

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