ADAPTIVE MESH MODELING AND BARRIER OPTION PRICING UNDER A JUMP‐DIFFUSION PROCESS

The computational burden of numerical barrier option pricing is significant, even prohibitive, for some parameterizations—especially for more realistic models of underlying asset behavior, such as jump diffusions. We extend a binomial jump diffusion pricing algorithm into a trinomial setting and demonstrate how an adaptive mesh may fit into the model. Our result is a barrier option pricing method that employs fewer computational resources, reducing run times substantially. We demonstrate that this extension allows the pricing of options that were previously computationally infeasible and examine the parameterizations in which use of the adaptive mesh is most beneficial.     

Sovereign Dilemmas: Saudi Arabia and Sovereign Wealth Funds

While the countries of the Gulf Cooperation Council (GCC) can claim over half of SWF assets globally, the largest and most strategically important state, the Kingdom of Saudi Arabia, has heretofore lacked a dedicated investment fund. This paper challenges some of the conventional wisdom on SWFs in explaining the Saudi government's reticence to launch an SWF and its recent decision to cautiously move in this direction. First, while Washington policy makers raise fears of enemies using SWFs against US interests, Saudi foreign assets have been used in support of its continuing alliance with the United States. And second, while critics decry the lack of transparency of SWFs, the Saudi launch of a new SWF could represent a move toward greater transparency, by working to separate “private” sovereign funds from “public” ones. Indeed, the launch of a SWF fits into a broad pattern of reforms rationalising Saudi governing institutions as King Abdullah has moved to control spendthrift princes, to streamline decision making, and to attract more foreign investment.