EXPANSION FORMULAS FOR EUROPEAN OPTIONS IN A LOCAL VOLATILITY MODEL-Reference-Cited by-同舟云学术

EXPANSION FORMULAS FOR EUROPEAN OPTIONS IN A LOCAL VOLATILITY MODEL

Published:2010-06 Issue:04 Volume:13 Page:603-634
ISSN:0219-0249
Container-title:International Journal of Theoretical and Applied Finance
language:en
Short-container-title:Int. J. Theor. Appl. Finan.

Author:

BENHAMOU E.¹,GOBET E.²,MIRI M.¹

Affiliation:

1. Pricing Partners, 204 rue de Crimée, 75019, Paris, France

2. Laboratoire Jean Kuntzmann, Université de Grenoble and CNRS, BP 53, 38041 Grenoble cedex 9, France

Abstract

Because of its very general formulation, the local volatility model does not have an analytical solution for European options. In this article, we present a new methodology to derive closed form solutions for the price of any European options. The formula results from an asymptotic expansion, terms of which are Black-Scholes price and related Greeks. The accuracy of the formula depends on the payoff smoothness and it converges with very few terms.

Publisher

World Scientific Pub Co Pte Lt

Subject

General Economics, Econometrics and Finance,Finance

Link

https://www.worldscientific.com/doi/pdf/10.1142/S0219024910005887

Reference13 articles.

1. Pricing options under stochastic volatility: a power series approach

2. Smart expansion and fast calibration for jump diffusions

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