Related papers: Pricing commodity index options
We introduce a class of randomly time-changed fast mean-reverting stochastic volatility models and, using spectral theory and singular perturbation techniques, we derive an approximation for the prices of European options in this setting.…
In this paper, we consider option pricing in a framework of the fractional Heston-type model with $H>1/2$. As it is impossible to obtain an explicit formula for the expectation $\mathbb E f(S_T)$ in this case, where $S_T$ is the asset price…
In this paper, we consider the problem of pricing discretely-sampled variance swaps based on a hybrid model of stochastic volatility and stochastic interest rate with regime-switching. Our modelling framework extends the Heston stochastic…
The aim of this paper is to present a simple stochastic model that accounts for the effects of a long-memory in volatility on option pricing. The starting point is the stochastic Black-Scholes equation involving volatility with long-range…
In financial markets, accurately measuring the risk of future fluctuations in asset prices is of paramount importance. Studies such as Carr and Madan have shown that the expected value of the quadratic variation of log prices can be…
The multidimensional Uncertain Volatility Model leads to robust option pricing problems under joint volatility and correlation uncertainty. Their numerical resolution quickly becomes challenging because the associated stochastic control…
It is well documented that a model for the underlying asset price process that seeks to capture the behaviour of the market prices of vanilla options needs to exhibit both diffusion and jump features. In this paper we assume that the asset…
Studying Binomial and Gaussian return dynamics in discrete time, we show how excess volatility can be traded to create growth. We test our results on real world data to confirm the observed model phenomena while also highlighting implicit…
Electricity markets are under increasing pressure to maintain reliability amidst rising renewable penetration, demand variability, and occasional price shocks. Traditional capacity market designs often fall short in addressing this by…
We extend a linear version of the liquidity risk model of Cetin et al. (2004) to allow for price impacts. We show that the impact of a market order on prices depends on the size of the transaction and the level of liquidity. We obtain a…
Derivatives on the Chicago Board Options Exchange volatility index (VIX) have gained significant popularity over the last decade. The pricing of VIX derivatives involves evaluating the square root of the expected realised variance which…
We propose a time-adaptive, high-order compact finite difference scheme for option pricing in a family of stochastic volatility models. We employ a semi-discrete high-order compact finite difference method for the spatial discretisation,…
In this paper we derive an effective equation for derivative pricing which accounts for the presence of virtual arbitrage opportunities and their elimination by the market. We model the arbitrage return by a stochastic process and find an…
We describe a model of a communication network that allows us to price complex network services as financial derivative contracts based on the spot price of the capacity in individual routers. We prove a theorem of a Girsanov transform that…
We obtain option pricing formulas for stock price models in which the drift and volatility terms are functionals of a continuous history of the stock prices. That is, the stock dynamics follows a nonlinear stochastic functional differential…
We consider the supOU stochastic volatility model which is able to exhibit long-range dependence. For this model we give conditions for the discounted stock price to be a martingale, calculate the characteristic function, give a strip where…
We present an option pricing formula for European options in a stochastic volatility model. In particular, the volatility process is defined using a fractional integral of a diffusion process and both the stock price and the volatility…
Reliability Options are capacity remuneration mechanisms aimed at enhancing security of supply in electricity systems. They can be framed as call options on electricity sold by power producers to System Operators. This paper provides a…
A new approximate Bayesian inferential framework is proposed that exploits multiple information sources -- daily spot returns, high-frequency spot data and option prices -- and enables fast calculation of probabilistic predictions of future…
This study delves into the intricate realm of risk evaluation within the domain of specific financial derivatives, notably options. Unlike other financial instruments, like bonds, options are susceptible to broader risks. A distinctive…