Explicit Option Pricing Formula for a Mean-Reverting Asset
Anatoliy Swishchuk
Abstract: We consider a risky asset following a mean-reverting stochastic
process St described by the following stochastic differential equation
dSt = a(L − St)dt + StdWt.
Using a change of time method we find an explicit solution of this equation
and using this solution we are able to find the option pricing formula under
the physical measure. Then, using the same argument, we find the option
pricing formula under risk-neutral measure. A numerical example for the
AECO Natural Gas Index for the period 1 May 1998 to 30 April 1999 is
presented.