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A jump telegraph model for option pricing 

Author: Nikita Ratanov a
Affiliation:   a Universidad del Rosario, Bogotaacute, Colombia
DOI: 10.1080/14697680600991226
Publication Frequency: 8 issues per year
Published in: journal Quantitative Finance, Volume 7, Issue 5 October 2007 , pages 575 - 583
Formats available: HTML (English) : PDF (English)
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Abstract

In this paper we introduce a financial market model based on continuous time random motions with alternating constant velocities and jumps occurring when the velocities are switching. This model is free of arbitrage if jump directions are in a certain correspondence with the velocities of the underlying random motion. Replicating strategies for European options are constructed in detail. Exact formulae for option prices are derived.
Keywords: Financial market; Telegraph process; Hedging
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