Reliable and Sophisticated Advanced Stressed Crises Compound Options Pricing Models

Abstract

Compound Options are Exotic Derivatives Instruments that can be used to minimize the degree of investment risk, inhedging and speculative strategies which makes them Cheaper than the plain vanilla options and highlyleveraged.From the traditional Robert Geske (1979) and Rubistein (1991) methods of compound options valuation(which simply assumed Normality) to Monte Carlo simulations method of valuation (which transform n –simulations of uniform variables into Normal Variables) were all underestimate (overestimate) the compound optionsprices because of the simple Normality Assumptions that governed the formulation of the models or process.Aboveall they lag the incorporation of Fat – Tailed Effects of returns on compound options underlying assets’ probabilitydistributions to enable them capture the popular Black Swan Events as propagated by Nassim N. Taleb and otherprofessional risk management associations like PRMIA.However, in this paper, the Author attempted to incorporatefat – tailed effects into the models using Jameel’s Contractional and Expansional Stress Methods so as to enablethem precisely traces the trajectories of the Past and Future Black Swan events to avoid reoccurrences of futureeconomic and financial crises related to exotic options more often otherwise makes the existing models more reliable,robust, sophisticated and holistic. Finally, the proposed Jameel’s Advanced Stressed Exotic Options Pricing Modelsare expected to dramatically increase the markets Confidence and drastically decreases the markets Risks.