Local and Stochastic Volatility Models: An Investigation into the Pricing of Exotic Equity Options
| 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.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.identifier.uri | http://hdl.handle.net/10539/1495 | |
| 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 |