Liquidity-adjusted digital power option pricing under a jump-diffusion process

This paper investigates the pricing of digital power option in incomplete markets with liquidity constraints. First, we adopt a model incorporating liquidity risk and jump risk to capture the dynamics of asset prices. Subsequently, the options are priced by applying the martingale approach, yielding a closed-form solution. Then, through convergence analysis and Monte-Carlo simulation, the accuracy of the proposed model is confirmed. Finally, a sensitivity analysis is conducted to illustrate the impact of liquidity risk and jump risk on the model prices.