Local and Stochastic Volatility Models: An Investigation into the Pricing of Exotic Equity Options

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dc.contributor.author Majmin, Lisa
dc.date.accessioned 2006-10-27T12:55:11Z
dc.date.available 2006-10-27T12:55:11Z
dc.date.issued 2006-10-27T12:55:11Z
dc.identifier.uri http://hdl.handle.net/10539/1495
dc.description Faculty of Science; School of Computational and Applied Maths; MSC Thesis en
dc.description.abstract The assumption of constant volatility as an input parameter into the Black-Scholes option pricing formula is deemed primitive and highly erroneous when one considers the terminal distribution of the log-returns of the underlying process. To account for the `fat tails' of the distribution, we consider both local and stochastic volatility option pricing models. Each class of models, the former being a special case of the latter, gives rise to a parametrization of the skew, which may or may not re°ect the correct dynamics of the skew. We investigate a select few from each class and derive the results presented in the corresponding papers. We select one from each class, namely the implied trinomial tree (Derman, Kani & Chriss 1996) and the SABR model (Hagan, Kumar, Lesniewski & Woodward 2002), and calibrate to the implied skew for SAFEX futures. We also obtain prices for both vanilla and exotic equity index options and compare the two approaches. en
dc.format.extent 960347 bytes
dc.format.mimetype application/pdf
dc.language.iso en en
dc.subject Black-Scholes en
dc.subject SABR model en
dc.subject SAFEX en
dc.title Local and Stochastic Volatility Models: An Investigation into the Pricing of Exotic Equity Options en
dc.type Thesis en


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