R/put_price_linear.R

In mociepa/ShortfallRiskHedging: Shortfall Risk Hedging for european option

#' @title Calculate modified european put option
#'
#' @description
#' The put_price_linear function takes parameters from Black-Scholes model and returns a price of modified europeanput option.
#'
#' @usage put_price_linear(asset, strike, rate, vol, drift, time, End_Time, L)
#'
#' @param asset a numeric vector of asset prices.
#' @param strike numeric value, strike price for call or put option.
#' @param rate numeric value, risk free rate in the model, r >= 0.
#' @param vol numeric value, volatility of the model, vol > 0.
#' @param drift numeric value, drift of the model.
#' @param time a numeric vector of actual time, time > 0.
#' @param End_Time end time of the option, End_time >= time.
#' @param L a numeric value, determines where option payoff is zero, see details, L > 0.
#' @return A numeric vector, price of the modification of european put option using linear loss function.
#'
#' @details Payoff of this modified call option is:
#' ## \eqn{ 1(asset > L)(strike - asset)^+ }, when \eqn{ drift > rate }.
#' ## \eqn{ 1(asset < L)(strike - asset)^+ }, when \eqn{ drift < rate }.
#' ## \eqn{ L(strike - asset)^+ }, when \eqn{ drift == rate }, of course in this case L <= 1.
#'
#'
#' @examples
#' put_price_linear(100, 100, 0, 0.5, 0.05, 0, 1, 50)
#' put_price_linear(c(100, 120), 100, 0, 0.3, 0.05, 0, 1, 90)
#' put_price_linear(c(100, 120), 100, 0, 0.3, 0.05, c(0, 0.5), 1, 90)
#'
#'
#'
#' @export

put_price_linear <- function(asset, strike, rate, vol, drift, time, End_Time, L){
  m = drift - rate
  tau = End_Time - time

  if(m > 0){
    if(L >= strike){
      result <- 0
    }
    else{
      result1 <- put_price( asset, strike, rate, vol, time, End_Time ) - put_price( asset, L, rate, vol, time, End_Time ) +
        (L - strike)*pnorm( -d2(asset, L, rate, vol, time, End_Time) )*exp(-rate*tau)
      result <- ifelse(asset == L & tau == 0, 0, result1)
    }
  }

  else if(m < 0){
    if(L >= strike){
      result <- put_price( asset, strike, rate, vol, time, End_Time )
    }
    else{
      result1 <- put_price( asset, L, rate, vol, time, End_Time ) + (strike - L)*pnorm( -d2(asset, L, rate, vol, time, End_Time) )*exp(-rate*tau)
      result <- ifelse(asset == L & tau == 0, 0, result1)
    }
  }

  else{
    if(L > 1){
      warning( "The drift is equal to the risk free rate. In this case L parameter should be in range (0, 1)." )
    }
    result <- L*put_price( asset, strike, rate, vol, time, End_Time )
  }

  return(result)
}