Progettazione, validazione ed implementazione di un modello reticolare avanzato per il pricing di un Flexible Forward su valute

Abstract

The purpose of this article is to illustrate the pricing model for Flexi-Forward contracts written on currencies through the use of an advanced lattice approach, called AMM – Adaptive Mesh Method. Flexi-Forward, also known as time-option forward contract, is a financial product which provides for an exchange of an agreed notional in a foreign currency in any moment between two fixed dates. If the right has not been exercised during the life of the option, the holder has to deliver the amount at maturity. In financial terms, a contract with these features can be split into an American call option and a European knockout put barrier option, where the barrier level is dynamically fixed in function of the probability state for which the American option goes in-the-money. Given this peculiarity it is necessary to implement a numerical method in order to obtain the fair value such as the AMM model proposed by Figlewski and Gao. This paper can be divided into three parts: - First the AMM model used for the pricing of a Flexible Forward has been presented. - Second we validate the code written in Matlab by comparing the price of the two synthetic options that make up the strategy. In particular, the fair value of the American call computed using AMM has been compared with the quasi-closed pricing formula developed by di Barone-Adesi-Whaley and Bjerksund-Stensland and the fair value of the standard barrier put has been validated using the analytical set of equations proposed by Rubinstein-Reiner. - Third we conclude by showing a real market application and how these pricing routines can be implemented in an automatic pricing system.

Keywords

• flexible forward pricing
• time-option forward contract
• advanced lattice method
• adaptive mesh method (amm)
• automatic pricing system
• matlab integration