I am somewhat familiar with options but am wondering how to price calls/puts on this one:
- European exercise
- "Jumps" in underlying may occur
- Takes physical delivery upon exercise (is this even relevant?)
- Fractional contracts not allowed (technically, though it should be arbitrage-free in reality)
- Underlying's value fluctuates in short-term (i.e. supply/demand) but generally decays over long-term
I am thinking you would input underlying price, volatility, time, and discount rate (decay), accepting some form of GBM. Not really sure though. Can someone please share 'what' this option is and the pricing models available? It seems something like a commodity or futures option but my knowledge in this arena is limited. I would like some formulas (or guidance towards) on how to price this. I have Excel, Matlab, and Maple at my disposal. Thanks in advance!