A new valuation and calibration method for VIX futures and VIX options is proposed. The method is based on a closed-form Hermite series expansion for a stochastic volatility model with the stochastic variance process driven by an affine drift term. We implement the methodology for the Heston and...

Attempted dynamic replication based valuation of equity options is analyzed using the Optimal Hedge Monte-Carlo (OHMC) method. Detailed here are (1) the option hedging strategy and its costs; (2) irreducible hedging errors associated with realistically fat-tailed & asymmetric return...

Risk control, capital allocation, and realistic derivative pricing and hedging are critical concerns for major financial institutions and individual traders alike. Events from the collapse of Lehman Brothers to the Greek sovereign debt crisis demonstrate the urgent and abiding need for...