Option Pricing with Stochastic Volatility: A Closed-form Solution Using the Fourier Transform

2002 ◽  
Author(s):  
Bogdan Negrea
Keyword(s):  
Fourier Transform ◽  
Option Pricing ◽  
Closed Form ◽  
Stochastic Volatility ◽  
Closed Form Solution ◽  
Form Solution ◽  
The Fourier Transform

scholarly journals DECOMPOSITION FORMULA FOR JUMP DIFFUSION MODELS

2018 ◽  
Vol 21 (08) ◽  
pp. 1850052
Author(s):  
R. MERINO ◽  
J. POSPÍŠIL ◽  
T. SOBOTKA ◽  
J. VIVES
Keyword(s):  
Option Pricing ◽  
Closed Form ◽  
Stochastic Volatility ◽  
Closed Form Solution ◽  
Form Solution ◽  
Heston Model ◽  
Approximation Formula ◽  
Option Prices ◽  
Currency Options ◽  
Decomposition Formula

In this paper, we derive a generic decomposition of the option pricing formula for models with finite activity jumps in the underlying asset price process (SVJ models). This is an extension of the well-known result by Alòs [(2012) A decomposition formula for option prices in the Heston model and applications to option pricing approximation, Finance and Stochastics 16 (3), 403–422, doi: https://doi.org/10.1007/s00780-012-0177-0 ] for Heston [(1993) A closed-form solution for options with stochastic volatility with applications to bond and currency options, The Review of Financial Studies 6 (2), 327–343, doi: https://doi.org/10.1093/rfs/6.2.327 ] SV model. Moreover, explicit approximation formulas for option prices are introduced for a popular class of SVJ models — models utilizing a variance process postulated by Heston [(1993) A closed-form solution for options with stochastic volatility with applications to bond and currency options, The Review of Financial Studies 6 (2), 327–343, doi: https://doi.org/10.1093/rfs/6.2.327 ]. In particular, we inspect in detail the approximation formula for the Bates [(1996), Jumps and stochastic volatility: Exchange rate processes implicit in Deutsche mark options, The Review of Financial Studies 9 (1), 69–107, doi: https://doi.org/10.1093/rfs/9.1.69 ] model with log-normal jump sizes and we provide a numerical comparison with the industry standard — Fourier transform pricing methodology. For this model, we also reformulate the approximation formula in terms of implied volatilities. The main advantages of the introduced pricing approximations are twofold. Firstly, we are able to significantly improve computation efficiency (while preserving reasonable approximation errors) and secondly, the formula can provide an intuition on the volatility smile behavior under a specific SVJ model.

A CLOSED-FORM PRICING FORMULA FOR EUROPEAN EXCHANGE OPTIONS WITH STOCHASTIC VOLATILITY

2021 ◽  
pp. 1-10
Author(s):  
Puneet Pasricha ◽  
Anubha Goel
Keyword(s):  
Closed Form ◽  
Stochastic Volatility ◽  
Closed Form Solution ◽  
Form Solution ◽  
Stochastic Volatility Model ◽  
Strike Price ◽  
Volatility Model ◽  
Exchange Options ◽  
Pricing Formula ◽  
Exchange Option

This article derives a closed-form pricing formula for the European exchange option in a stochastic volatility framework. Firstly, with the Feynman–Kac theorem's application, we obtain a relation between the price of the European exchange option and a European vanilla call option with unit strike price under a doubly stochastic volatility model. Then, we obtain the closed-form solution for the vanilla option using the characteristic function. A key distinguishing feature of the proposed simplified approach is that it does not require a change of numeraire in contrast with the usual methods to price exchange options. Finally, through numerical experiments, the accuracy of the newly derived formula is verified by comparing with the results obtained using Monte Carlo simulations.

scholarly journals FOURIER TRANSFORM METHODS FOR REGIME-SWITCHING JUMP-DIFFUSIONS AND THE PRICING OF FORWARD STARTING OPTIONS

2012 ◽  
Vol 15 (05) ◽  
pp. 1250037 ◽  
Author(s):  
ALESSANDRO RAMPONI
Keyword(s):  
Fourier Transform ◽  
Regime Switching ◽  
Closed Form Solution ◽  
Jump Diffusion ◽  
Form Solution ◽  
Transform Method ◽  
Finite State ◽  
Jump Diffusion Model ◽  
Log Price ◽  
The Fourier Transform

In this paper we consider a jump-diffusion dynamic whose parameters are driven by a continuous time and stationary Markov Chain on a finite state space as a model for the underlying of European contingent claims. For this class of processes we firstly outline the Fourier transform method both in log-price and log-strike to efficiently calculate the value of various types of options and as a concrete example of application, we present some numerical results within a two-state regime switching version of the Merton jump-diffusion model. Then we develop a closed-form solution to the problem of pricing a Forward Starting Option and use this result to approximate the value of such a derivative in a general stochastic volatility framework.

The Axially Loaded Circular Cylinder

1962 ◽  
Vol 29 (2) ◽  
pp. 318-320
Author(s):  
H. D. Conway
Keyword(s):  
Exact Solution ◽  
Fourier Transform ◽  
Circular Cylinder ◽  
Closed Form ◽  
Cross Sections ◽  
Closed Form Solution ◽  
Form Solution ◽  
Concentrated Force ◽  
Transform Method ◽  
Fourier Transform Method

Commencing with Kelvin’s closed-form solution to the problem of a concentrated force acting at a given point in an indefinitely extended solid, a Fourier transform method is used to obtain an exact solution for the case when the force acts along the axis of a circular cylinder. Numerical values are obtained for the maximum direct stress on cross sections at various distances from the force. These are then compared with the corresponding stresses from the solution for an infinitely long strip, and in both cases it is observed that the stresses are practically uniform on cross sections greater than a diameter or width from the point of application of the load.

scholarly journals Dynamic Analysis of an Infinitely Long Beam Resting on a Kelvin Foundation under Moving Random Loads

2017 ◽  
Vol 2017 ◽  
pp. 1-13
Author(s):  
Y. Zhao ◽  
L. T. Si ◽  
H. Ouyang
Keyword(s):  
Fourier Transform ◽  
Random Vibration ◽  
Moving Load ◽  
Closed Form Solution ◽  
Form Solution ◽  
Integration Scheme ◽  
Random Loads ◽  
Numerical Integration Scheme ◽  
Vibration Responses ◽  
The Fourier Transform

Nonstationary random vibration analysis of an infinitely long beam resting on a Kelvin foundation subjected to moving random loads is studied in this paper. Based on the pseudo excitation method (PEM) combined with the Fourier transform (FT), a closed-form solution of the power spectral responses of the nonstationary random vibration of the system is derived in the frequency-wavenumber domain. On the numerical integration scheme a fast Fourier transform is developed for moving load problems through a parameter substitution, which is found to be superior to Simpson’s rule. The results obtained by using the PEM-FT method are verified using Monte Carlo method and good agreement between these two sets of results is achieved. Special attention is paid to investigation of the effects of the moving load velocity, a few key system parameters, and coherence of loads on the random vibration responses. The relationship between the critical speed and resonance is also explored.

An Analytical Approximation for Option Price under the Affine GARCH Model - A Comparison with the Closed-Form Solution of Heston-Nandi

GIS Business ◽  
2017 ◽  
Vol 12 (4) ◽  
pp. 32-46
Author(s):  
Noureddine Lahouel ◽  
Slaheddine Hellara
Keyword(s):  
Option Pricing ◽  
Closed Form ◽  
Empirical Work ◽  
Closed Form Solution ◽  
Garch Model ◽  
Analytical Approximation ◽  
Form Solution ◽  
Option Prices ◽  
European Option ◽  
Comparative Performance

In the option pricing theory, two important approaches have been developed to evaluate the prices of a European option. The first approach develops an almost closed-form option pricing formula under a specific GARCH process (Heston & Nandi, 2000). The second approach develops an analytical approximation for computing European option prices with more widespread NGARCH models (Duan, Gauthier & Simonato, 1999). The analytical approximation was also developed under GJR-GARCH and EGARCH models by Duan, Gauthier, Sasseville & Simonato (2006). However, no empirical work was performed to study the comparative performance of these two formulas (closed-form solution and analytical approximation). Also, it is possible to develop an analytical approximation under the specific GARCH model of Heston & Nandi (2000). In this paper, we have filled up those gaps. We started with the development of an analytical approximation, for computing European option prices, under Heston-Nandis GARCH model. In the second step, we carried out a comparative analysis of the three formulas using CAC 40 index returns from 31 December 1987 to 31 December 2013.

EXACT PRICING WITH STOCHASTIC VOLATILITY AND JUMPS

2010 ◽  
Vol 13 (06) ◽  
pp. 901-929 ◽  
Author(s):  
FERNANDA D'IPPOLITI ◽  
ENRICO MORETTO ◽  
SARA PASQUALI ◽  
BARBARA TRIVELLATO
Keyword(s):  
Closed Form ◽  
Stochastic Volatility ◽  
Closed Form Solution ◽  
Exact Algorithm ◽  
Form Solution ◽  
Closed Form Expression ◽  
Barrier Options ◽  
Form Expression ◽  
Variance Swaps ◽  
Jump Diffusion Model

A stochastic volatility jump-diffusion model for pricing derivatives with jumps in both spot return and volatility underlying dynamics is presented. This model admits, in the spirit of Heston, a closed-form solution for European-style options. The structure of the model is also suitable to explicitly obtain the fair delivery price for variance swaps. To evaluate derivatives whose value does not admit a closed-form expression, a methodology based on an "exact algorithm", in the sense that no discretization of equations is required, is developed and applied to barrier options. Goodness of pricing algorithm is tested using DJ Euro Stoxx 50 market data for European options. Finally, the algorithm is applied to compute prices and Greeks for barrier options and to determine the fair delivery prices for variance swaps.

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