MPS-RR 2002-33
October 2002

Comparative Study of First Touch Digitals: Normal Inverse Gaussian vs. Gaussian Modelling

by:

Oleg Kudryavtsev, Sergei Levendorskii

Abstract

We calculate prices of first touch digitals under normal inverse gaussian (NIG) processes, and compare them to prices in the gaussian model with the same instantaneous variance. Numerical results are produced to show that for typical parameters values, the relative error of the gaussian approximation to NIG-price can be several dozen percent if the spot price is at the distance 0.05-0.2 from the barrier (normalized to one). A fast approximate pricing formula under NIG is derived.

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