- Applications of delta-functions perturbation to the pricing of derivative securities
- Physica A : Statistical Mechanics and its Applications
- Volume | Issue number
- 342 | 3-4
- Pages (from-to)
- Number of pages
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
In the recent econophysics literature, the use of functional integrals is widespread for the calculation of option prices. In this paper, we extend this approach in several directions by means of -function perturbations. First, we show that results about infinitely repulsive -function are applicable to the pricing of barrier options. We also introduce functional integrals over skew paths that give rise to a new European option formula when combined with -function potential. We propose accurate closed-form approximations based on the theory of comonotonic risks in case the functional integrals are not analytically computable.
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