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Sep 16

Cliquet option with Jump-Diffusion Bates Model

Posted by abiao at 21:30 | Code » C++ | Comments(1) | Reads(14589)
Cliquet option, also called ratchet option,  is an extended roll-down option, with strikes set at the barriers, which never knock out completely. It is a series of at the money options, with periodic settlement, resetting the strike value at the then current price level, at which time, the option locks in the difference between the old and new strike and pays that out as the profit. The profit can be accumulated until final maturity, or paid out at each reset date.

The Bates Model is a type of Jump-Difussion model that is able to improve calibration results for short term options. The Bates Model consists of Jumps processes built on top a Heston model.

http://www.javaquant.net/finalgo/BatesModel.html lists the C++ code to price Cliquet options using the Log-Jump variant of the Bates model with stochastic volatility.

wiki(Cliquet option)

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