Time for a timer

Timer options are derivatives that expire when the underlying’s realised variance hits a certain level, adding another layer of complexity that is usually tackled with computationally costly numerical methods. Minqiang Li and Fabio Mercurio show how analytical approximations can speed up pricing without compromising accuracy

Timer options are derivatives whose maturity is random. They come in perpetual and finite-maturity versions. For perpetual timer options, the expiry is the random future time at which the asset’s accumulated variance first hits a certain level. For finite-maturity timer options, a maximum maturity is specified in the contract, so that exercise can only take place before or at a contractual expiry time. Recently, these contracts have become popular in the equities market – after being introduced