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Stochastic Volatility: Option Pricing using a Multinomial Recombining Tree

Florescu, Ionuţ; Viens, Frederi - In: Applied Mathematical Finance 15 (2008) 2, pp. 151-181

The problem of option pricing is treated using the Stochastic Volatility (SV) model: the volatility of the underlying asset is a function of an exogenous stochastic process, typically assumed to be mean-reverting. Assuming that only discrete past stock information is available, an interacting...

Persistent link: https://www.econbiz.de/10005279065

Modelling Electricity Prices with Forward Looking Capacity Constraints

Cartea, Álvaro - 2013

We present a spot price model for wholesale electricity prices which incorporates forward looking information that is available to all market players. We focus on information that measures the extent to which the capacity of the England and Wales generation park will be constrained over the next...

Persistent link: https://www.econbiz.de/10012711253

On superhedging under delta constraints

Sekine, Jun - In: Applied Mathematical Finance 9 (2002) 2, pp. 103-121

The superhedging problem of derivative securities under the constraint of portfolio amounts is revisited. This paper … considers more general forms of constraints, characterizes the minimal superhedging cost using a 'dual' maximization problem …, and shows that a replicating strategy of the so-called 'face-lifted' claim gives a minimal superhedging strategy in the …

Persistent link: https://www.econbiz.de/10005279074

A note on arbitrage-free pricing of forward contracts in energy markets

Benth, Fred Espen; Ekeland, Lars; Hauge, Ragnar; … - In: Applied Mathematical Finance 10 (2003) 4, pp. 325-336

Arbitrage theory is used to price forward (futures) contracts in energy markets, where the underlying assets are non-tradeable. The method is based on the so-called 'fitting of the yield curve' technique from interest rate theory. The spot price dynamics of Schwartz is generalized to...

Persistent link: https://www.econbiz.de/10005495373

Misspecified asset price models and robust hedging strategies

Adviti, Hyungsok Ahn; Swindle, Glen - In: Applied Mathematical Finance 4 (1997) 1, pp. 21-36

The Black-Scholes theory of option pricing requires a perfectly specified model for the underlying price. Frequently this is taken to be a geometric Brownian motion with a constant, known volatility. In practice, parameters such as the volatility are not known precisely, but are simply estimates...

Persistent link: https://www.econbiz.de/10005495380

Liquidity and credit risk

Cherubini, Umberto; Lunga, Giovanni Della - In: Applied Mathematical Finance 8 (2001) 2, pp. 79-95

The paper uses fuzzy measure theory to represent liquidity risk, i.e. the case in which the probability measure used to price contingent claims is not known precisely. This theory enables one to account for different values of long and short positions. Liquidity risk is introduced by...

Persistent link: https://www.econbiz.de/10005495423

Optimal hedging strategies for misspecified asset price models

Ahn, Hyungsok; Muni, Adviti; Swindle, Glen - In: Applied Mathematical Finance 6 (1999) 3, pp. 197-208

The Black-Scholes option pricing methodology requires that the model for the price of the underlying asset be completely specified. Often the underlying price is taken to be a geometric Brownian motion with a constant, known volatility. In practice one does not know precise values of parameters...

Persistent link: https://www.econbiz.de/10005462491

Indifference Pricing and Hedging for Volatility Derivatives

Grasselli, M. R.; Hurd, T. R. - In: Applied Mathematical Finance 14 (2007) 4, pp. 303-317

Utility based indifference pricing and hedging are now considered to be an economically natural method for valuing contingent claims in incomplete markets. However, acceptance of these concepts by the wide financial community has been hampered by the computational and conceptual difficulty of...

Persistent link: https://www.econbiz.de/10005462493

Utility based pricing of contingent claims in incomplete markets

Gam, Andrea; Pellizzari, Paolo - In: Applied Mathematical Finance 9 (2002) 4, pp. 241-260

In a discrete setting, a model is developed for pricing a contingent claim in incomplete markets. Since hedging opportunities influence the price of a contingent claim, the optimal hedging strategy is first introduced assuming that a contingent claim has been issued: a strategy implemented by...

Persistent link: https://www.econbiz.de/10005462523

Pricing American currency options in an exponential Levy model

Chesney, Marc; Jeanblanc, M. - In: Applied Mathematical Finance 11 (2004) 3, pp. 207-225

In this article the problem of the American option valuation in a Levy process setting is analysed. The perpetual case is first considered. Without possible discontinuities (i.e. with negative jumps in the call case), known results concerning the currency option value as well as the exercise...

Persistent link: https://www.econbiz.de/10005279053