Related papers: Option pricing under the normal SABR model with Ga…
The classical linear Black--Scholes model for pricing derivative securities is a popular model in financial industry. It relies on several restrictive assumptions such as completeness, and frictionless of the market as well as the…
We compare static arbitrage price bounds on basket calls, i.e. bounds that only involve buy-and-hold trading strategies, with the price range obtained within a multi-variate generalization of the Black-Scholes model. While there is no gap…
An efficient computational algorithm to price financial derivatives is presented. It is based on a path integral formulation of the pricing problem. It is shown how the path integral approach can be worked out in order to obtain fast and…
This paper develops a coupled model for day-ahead electricity prices and average daily temperature which allows to model quanto weather and energy derivatives. These products have gained on popularity as they enable to hedge against both…
We discuss modelling of SPX and DAX index option prices using the Shifted Log-Normal (SLN) model, (also known as Displaced Diffusion), and the SABR model. We found out that for SPX options, an example of strongly skewed option prices, SLN…
We apply Gauge Theory of Arbitrage (GTA) {hep-th/9710148} to derivative pricing. We show how the standard results of Black-Scholes analysis appear from GTA and derive correction to the Black-Scholes equation due to a virtual arbitrage and…
Following the foundational work of the Black--Scholes model, extensive research has been developed to price the option by addressing its underlying assumptions and associated pricing biases. This study introduces a novel framework for…
We develop an arbitrage-free random field LIBOR market model to price cross-currency derivatives. The uncertainty of the forward LIBOR rates of our cross-currency model is driven by a two time parameter random field instead of a finite…
A novel method is proposed to infer Bayesian predictions of computationally expensive models. The method is based on the construction of quadrature rules, which are well-suited for approximating the weighted integrals occurring in Bayesian…
In this paper, we are concerned with the valuation of Guaranteed Annuity Options (GAOs) under the most generalised modelling framework where both interest and mortality rates are stochastic and correlated. Pricing these type of options in…
This paper presents a new hybrid model for predicting German electricity prices. The algorithm is based on a combination of Gaussian Process Regression (GPR) and Support Vector Regression (SVR). Although GPR is a competent model for…
Model uncertainty is a type of inevitable financial risk. Mistakes on the choice of pricing model may cause great financial losses. In this paper we investigate financial markets with mean-volatility uncertainty. Models for stock markets…
In this work, we consider the issue of pricing exchange options and spread options with stochastic interest rates. We provide the closed form solution for the exchange option price when interest rate is stochastic. Our result holds when…
We consider the problem of computing upper and lower bounds on the price of a European basket call option, given prices on other similar baskets. Although this problem is very hard to solve exactly in the general case, we show that in some…
When trading American and Asian options in the FX derivatives market, banks must calculate prices using a complex mathematical model. It is often observed that different models produce varying prices for the same exotic option, which…
We consider derivatives written on multiple underlyings in a one-period financial market, and we are interested in the computation of model-free upper and lower bounds for their arbitrage-free prices. We work in a completely realistic…
This paper examines the problem of pricing spread options under some models with jumps driven by Compound Poisson Processes and stochastic volatilities in the form of Cox-Ingersoll-Ross(CIR) processes. We derive the characteristic function…
We present a model for direct semi-parametric estimation of the State Price Density (SPD) implied in quoted option prices. We treat the observed prices as expected values of possible pay-offs at maturity, weighted by the unknown probability…
In this paper we introduce an additive two-factor model for electricity futures prices based on Normal Inverse Gaussian L\'evy processes, that fulfills a no-overlapping-arbitrage (NOA) condition. We compute European option prices by Fourier…
In the present paper, we introduce a numerical scheme for the price of a barrier option when the price of the underlying follows a diffusion process. The numerical scheme is based on an extension of a static hedging formula of barrier…