We consider a simple and tractable model for an asset price process that is subject to a large jump with a known time of occurrence. These situations often arise around scheduled news releases such as quarterly earnings announcements, monetary policy decisions or political elections. This post is the first in a series on this topic. I provide the general pricing setup and derive the characteristic function of the corresponding logarithmic return process including drift adjustment. Future posts then make specific choices for the jump size distribution and provide examples for the corresponding implied volatility smiles.
Option Pricing When a Single Jump is Anticipated I
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