PRICING HOLDER-EXTENDABLE CALL OPTIONS WITH MEAN-REVERTING STOCHASTIC VOLATILITY
| Autor: | S. N. I. IBRAHIM, A. DÍAZ-HERNÁNDEZ, J. G. O’HARA, N. CONSTANTINOU |
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| Rok vydání: | 2019 |
| Předmět: | |
| Zdroj: | The ANZIAM Journal. 61:382-397 |
| ISSN: | 1446-8735 1446-1811 |
| DOI: | 10.1017/s1446181119000142 |
| Popis: | Options with extendable features have many applications in finance and these provide the motivation for this study. The pricing of extendable options when the underlying asset follows a geometric Brownian motion with constant volatility has appeared in the literature. In this paper, we consider holder-extendable call options when the underlying asset follows a mean-reverting stochastic volatility. The option price is expressed in integral forms which have known closed-form characteristic functions. We price these options using a fast Fourier transform, a finite difference method and Monte Carlo simulation, and we determine the efficiency and accuracy of the Fourier method in pricing holder-extendable call options for Heston parameters calibrated from the subprime crisis. We show that the fast Fourier transform reduces the computational time required to produce a range of holder-extendable call option prices by at least an order of magnitude. Numerical results also demonstrate that when the Heston correlation is negative, the Black–Scholes model under-prices in-the-money and over-prices out-of-the-money holder-extendable call options compared with the Heston model, which is analogous to the behaviour for vanilla calls. |
| Databáze: | OpenAIRE |
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