Abstract
This paper considers the pricing of turbo warrants under a hybrid stochastic and local volatility model. The model consists of the constant elasticity of variance model incorporated by a fast fluctuating Ornstein-Uhlenbeck process for stochastic volatility. The sensitive structure of the turbo warrant price is revealed by asymptotic analysis and numerical computation based on the observation that the elasticity of variance controls leverage effects and plays an important role in characterizing various phases of volatile markets.
Highlights
Turbo warrants, which appeared first in Germany in late 2001, have experienced a considerable growth in Northern Europe and Hong Kong
They can be very sensitive to the change in volatility under stochastic volatility models as pointed out by [12], which is contrary to the case of the Black-Scholes model
Since the operator L2 corresponds to the constant elasticity of variance (CEV) operator for the turbo warrant, it is denoted by LCEV
Summary
Turbo warrants, which appeared first in Germany in late 2001, have experienced a considerable growth in Northern Europe and Hong Kong. The most well-known local volatility model is the constant elasticity of variance (CEV) model in which the volatility is given by a power function of the underlying security price. It has been proposed by Cox [3] and Cox and Ross [4]. Turbo warrants are barrier options with the rebate whose value is computed by another path dependent option They can be very sensitive to the change in volatility under stochastic volatility models as pointed out by [12], which is contrary to the case of the Black-Scholes model.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
