Related papers: Efficient and Accurate Calibration to FX Market Sk…
We study the local volatility function in the Foreign Exchange market where both domestic and foreign interest rates are stochastic. This model is suitable to price long-dated FX derivatives. We derive the local volatility function and…
Most models for barrier pricing are designed to let a market maker tune the model-implied covariance between moves in the asset spot price and moves in the implied volatility skew. This is often implemented with a local…
This paper studies equity basket options -- i.e., multi-dimensional derivatives whose payoffs depend on the value of a weighted sum of the underlying stocks -- and develops a new and innovative approach to ensure consistency between options…
The pricing of derivatives tied to baskets of assets demands a sophisticated framework that aligns with the available market information to capture the intricate non-linear dependency structure among the assets. We describe the dynamics of…
We propose Monte Carlo calibration algorithms for three models: local volatility with stochastic interest rates, stochastic local volatility with deterministic interest rates, and finally stochastic local volatility with stochastic interest…
This paper proposes a numerical method for pricing foreign exchange (FX) options in a model which deals with stochastic interest rates and stochastic volatility of the FX rate. The model considers four stochastic drivers, each represented…
There are no known exact formulas for the valuation of a number of exotic options, and this is particularly true for options under discrete monitoring and for American style options. Therefore, one usually recourses to a Monte Carlo…
Managing exotic derivatives requires accurate mark-to-market pricing and stable Greeks for reliable hedging. The Local Volatility (LV) model distinguishes itself from other pricing models by its ability to match observable market prices…
American options are the reference instruments for the model calibration of a large and important class of single stocks. For this task, a fast and accurate pricing algorithm is indispensable. The literature mainly discusses pricing methods…
We present a high-level framework that explains why, in practice, different pricing models calibrated to the same vanilla surface tend to produce similar valuations for exotic derivatives. Our approach acts as an overlay on the Monte Carlo…
In this paper we analyze American style of floating strike Asian call options belonging to the class of financial derivatives whose payoff diagram depends not only on the underlying asset price but also on the path average of underlying…
We suggest an intermediate currency approach that allows us to price options on all FX markets simultaneously under the same risk-neutral measure which ensures consistency of FX option prices across all markets. In particular, it is…
In this chapter, we consider volatility swap, variance swap and VIX future pricing under different stochastic volatility models and jump diffusion models which are commonly used in financial market. We use convexity correction approximation…
In this paper, we address the question of the optimal Delta and Vega hedging of a book of exotic options when there are execution costs associated with the trading of vanilla options. In a framework where exotic options are priced using a…
We develop a model for indifference pricing in derivatives markets where price quotes have bid-ask spreads and finite quantities. The model quantifies the dependence of the prices and hedging portfolios on an investor's beliefs, risk…
In this paper, we study the asymptotic behavior of Asian option prices in the worst case scenario under an uncertain volatility model. We give a procedure to approximate the Asian option prices with a small volatility interval. By imposing…
This study provides a consistent and efficient pricing method for both Standard & Poor's 500 Index (SPX) options and the Chicago Board Options Exchange's Volatility Index (VIX) options under a multiscale stochastic volatility model. To…
Local Stochastic Volatility (LSV) models have been used for pricing and hedging derivatives positions for over twenty years. An enormous body of literature covers analytical and numerical techniques for calibrating the model to market data.…
We introduce a new method to price American-style options on underlying investments governed by stochastic volatility (SV) models. The method does not require the volatility process to be observed. Instead, it exploits the fact that the…
We study a market model in which the volatility of the stock may jump at a random time from a fixed value to another fixed value. This model was already described in the literature. We present a new approach to the problem, based on partial…