We introduce a novel stochastic volatility model where the squared volatility of the asset return follows a Jacobi process. It contains the Heston model as a limit case. We show that the joint density of any finite sequence of log returns admits a Gram-Charlier A expansion with closed-form...

In a tractable stochastic volatility model, we identify the price of the smile as the price of the unspanned risks traded in SPX option markets. The price of the smile reflects two persistent volatility and skewness risks, which imply a downward sloping term structure of low-frequency variance...

We derive analytic series representations for European option prices in polynomial stochastic volatility models. This includes the Jacobi, Heston, Stein-Stein, and Hull-White models, for which we provide numerical case studies. We find that our polynomial option price series expansion performs...

At the time of writing this article, Fourier inversion is the computational method of choice for a fast and accurate calculation of plain vanilla option prices in models with an analytically available characteristic function. Shifting the contour of integration along the complex plane allows for...

The characteristic functions of many affine jump-diffusion models, such as Heston’s stochastic volatility model and all of its extensions, involve multivalued functions such as the complex logarithm. If we restrict the logarithm to its principal branch, as is done in most software packages,...

In electricity markets, futures contracts typically function as a swap since they deliver the underlying over a period of time. In this paper, we introduce a market price for the delivery periods of electricity swaps, thereby opening an arbitrage-free pricing framework for derivatives based on...

The purpose of this paper is to clarify some of the difficulties that a practitioner may find in implementing the binomial model for valuing a corporate bond with multiple embedded options in emerging markets. Especially, when faced with the dilemma of determining which should be the proxy...

The Brazilian government is now planning to implement natural forest concessions for timber extraction. In addition to the legal requirements imposed on the management of concessions (minimum reserves, maximum extraction rates, etc.), the value of concessions is closely linked with uncertainties...

This paper presents new look on option pricing and reconsiders derivation of the Black-Scholes-Merton equation. We argue options on stock price of economic agents that follow random Brownian walk on economic space. Risk ratings of economic agent play role of its coordinates on economic space....