Power Options Pricing in a Financial Market with Stochastic Analysis Tools

In this paper, power options are considered under a regime-switching model which can capture asset dynamics by permitting switching between different regimes. In our proposed model the appreciation rate and the volatility of the risky underlying asset depend on unobservable states of the economy described by a continuous-time hidden Markov chain process. We investigate a closed-form solution for power options pricing under our considered model