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We focus on closed-form option pricing in Heston s stochastic volatility model, in which closed-form formulas exist only for few option types. Most of these closed-form solutions are constructed from characteristic functions. We follow this approach and derive multivariate characteristic...
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The Heston model stands out from the class of stochastic volatility (SV) models mainly for two reasons. Firstly, the process for the volatility is nonnegative and mean-reverting, which is what we observe in the markets. Secondly, there exists a fast and easily implemented semi-analytical...
Persistent link: https://www.econbiz.de/10008663372
The foreign exchange options market is one of the largest and most liquid OTC derivative markets in the world. Surprisingly, very little is known in the academic literature about the construction of the most important object in this market: The implied volatility smile. The smile construction...
Persistent link: https://www.econbiz.de/10011293913
The primary purpose of this paper is to provide an in-depth analysis of a number of structurally different methods to numerically evaluate European compound option prices under Heston's stochastic volatility dynamics. Therefore, we first outline several approaches that can be used to price these...
Persistent link: https://www.econbiz.de/10013086105
In the valuation of continuous barrier options the distribution of the first hitting time plays a substantial role. In general, the derivation of a hitting time distribution poses a mathematically challenging problem for continuous but otherwise arbitrary boundary curves. When considering...
Persistent link: https://www.econbiz.de/10013091653
Compound options are not only sensitive to future movements of the underlying asset price, but also to future changes in volatility levels. Because the Black-Scholes analytical valuation formula for compound options is not able to incorporate the sensitivity to volatility, the aim of this paper...
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