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A Decomposition Formula for Option Price in the Heston Model

Sarmadi, Saeed | 2013

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 45620 (02)
  4. University: Sharif University of Technology
  5. Department: Mathematics
  6. Advisor(s): Zohuri Zangeneh, Bijan; Zamani, Shiva
  7. Abstract:
  8. By means of classical Itô calculus, we decompose option prices as the sum of the classical Black–Scholes formula, with volatility parameter equal to the root-meansquare future average volatility, plus a term due to correlation and a term due to the volatility of the volatility. This decomposition allows us to develop first- and second-order Approximation formulas for option prices and implied volatilities in the Heston volatility framework, as well as to study their accuracy for short maturities.Numerical examples are given
  9. Keywords:
  10. Ito Calculus ; Stochastic Volatility Model ; Heston Model

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