A Fourier-based approach for valuing bonds with embedded options: an analysis of convolution- and cosine-based approximation methods using jump-diffusion models and extended with stochastic interest rates

Due to their attractive characteristics, convertible and callable bonds became a more important class of fixed-income products within the financial market. Therefore, the need for fair and accurate pricing of convertible and callable bonds increases. Where the convertible option can be considered as a right for the bondholder, the callable...

Valuing Cross-Border Capacity as a Real Option: An IOHMM Approach

The right to use a certain amount of capacity in an electrical cable between two countries for the purpose of trading energy is an asset that can be bought. Each hour of capacity can be seen as a real spread option with the energy prices of each country being the underlying processes. In this thesis we build a model to find the fair value of a...

Cumulative Prospect Theory in Option Valuation and Portfolio Management

This thesis deals with different models for decision-making under risk in financial applications, mainly models that incorporate irrational human behavior. First of all, traditional expected utility theory is considered. Hereafter, two models that incorporate irrational human behavior are discussed and compared: prospect theory and cumulative...

Application of State Space Hidden Markov Models to the approximation of (embedded) option prices

This thesis discusses dimension reduction of the risk drivers that determine embedded option values by using the class of State Space Hidden Markov Models. As embedded options are typically valued by nested Monte Carlo simulations, this dimension reduction leads to a major reduction in computing time. This is especially important for insurance...