In general, derivation of closed-form analytic formulas for the prices of path-dependent exotic options is a challenging task when the underlying asset price model is chosen to be a stochastic volatility model. Pricing stop-loss and Russian options is studied under a multiscale stochastic volatility model in this paper. Both options are commonly perpetual American-style derivatives with a lookback provision. We derive closed-form formulas explicitly for the approximate prices of these two exotic options by using multiscale asymptotic analysis and partial differential equation method. The formulas can be efficiently computed starting with the Black-Scholes option prices. The accuracy of the analytic approximation is verified via Monte-Carlo simulations and the impacts of the multiscale stochastic volatility on the corresponding Black-Scholes option prices are revealed. Also, the performance of the model is compared with that of other models.

In this paper, we proposed a stochastic volatility model in which the volatility was given by stochastic processes representing two characteristic time scales of variation driven by approximate fractional Brownian motions with two Hurst exponents. We obtained an approximate closed-form formula for a European vanilla option price and the corresponding implied volatility formula based on singular and regular perturbations and a Mellin transform. The explicit formula for the implied volatility allowed us to find the slope of the implied volatility skew with respect to the Hurst exponent and time-to-maturity. The proposed model allows the market volatility behavior to be captured uniformly in time-to-maturity. We conducted an empirical analysis to find the validity of the proposed model by comparing it with other models and Monte Carlo simulation. Further, we extended the pricing result for the vanilla option to two path-dependent exotic (barrier and lookback) options and obtained the corresponding price formulas explicitly.