Pricing Virtual Paths with Quality-of-Service Guarantees as Bundle Derivatives

Details Pricing Virtual Paths with Quality-of-Service Guarantees as Bundle Derivatives Pricing Virtual Paths with Quality-of-Service Guarantees as Bundle Derivatives

2001-06-12

arxiv.org/abs/cs/0106028v1

Computer Science

Networking and Internet Architecture

22 pages (15 in main tex and 7 appendix), 5 postscript figures

Scientific paper

We describe a model of a communication network that allows us to price complex network services as financial derivative contracts based on the spot price of the capacity in individual routers. We prove a theorem of a Girsanov transform that is useful for pricing linear derivatives on underlying assets, which can be used to price many complex network services, and it is used to price an option that gives access to one of several virtual channels between two network nodes, during a specified future time interval. We give the continuous time hedging strategy, for which the option price is independent of the service providers attitude towards risk. The option price contains the density function of a sum of lognormal variables, which has to be evaluated numerically.

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