EXPANSION FORMULAS FOR EUROPEAN OPTIONS IN A LOCAL VOLATILITY MODEL

Because of its very general formulation, the local volatility model does not have an analytical solution for European options. In this article, we present a new methodology to derive closed form solutions for the price of any European options. The formula results from an asymptotic expansion, terms of which are Black-Scholes price and related Greeks. The accuracy of the formula depends on the payoff smoothness and it converges with very few terms.

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Year of publication:	2010
Authors:	BENHAMOU, E. ; GOBET, E. ; MIRI, M.
Published in:	International Journal of Theoretical and Applied Finance (IJTAF). - World Scientific Publishing Co. Pte. Ltd., ISSN 1793-6322. - Vol. 13.2010, 04, p. 603-634
Publisher:	World Scientific Publishing Co. Pte. Ltd.
Subject:	Local volatility model \| European options \| asymptotic expansion \| Malliavin calculus \| small diffusion process \| CEV model

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Extent:	application/pdf text/html
Type of publication:	Article
Source:	RePEc - Research Papers in Economics

Persistent link: https://ebvufind01.dmz1.zbw.eu/10008465482