Pricing exotic options under regime switching: A Fourier transform method
This paper considers the valuation of exotic options (i.e. digital, barrier, and lookback options) in a Markovian, regime-switching, Black-Scholes model. In Fourier space, analytical expressions for the option prices are derived via the theory on matrix Wiener-Hopf factorizations. A comparison to numerical alternatives, i.e. the Brownian bridge algorithm or a finite element scheme, demonstrates that the given formulas are easy to implement and lead to accurate and unbiased price estimates.