Title
On the valuation of fader and discrete barrier options in Heston's stochastic volatility model On the valuation of fader and discrete barrier options in Heston's stochastic volatility model
Author
Faculty/Department
Faculty of Sciences. Mathematics and Computer Science
Publication type
article
Publication
London ,
Subject
Economics
Mathematics
Source (journal)
Quantitative finance. - London
Volume/pages
11(2011) :5 , p. 693-709
ISSN
1469-7688
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Abstract
We focus on closed-form option pricing in Heston's stochastic volatility model, where closed-form formulas exist only for a few option types. Most of these closed-form solutions are constructed from characteristic functions. We follow this closed-form approach and derive multivariate characteristic functions depending on at least two spot values for different points in time. The derived characteristic functions are used as building blocks to set up (semi-) analytical pricing formulas for exotic options with payoffs depending on finitely many spot values such as fader options and discretely monitored barrier options. We compare our result with different numerical methods and examine the computational accuracy.
E-info
https://repository.uantwerpen.be/docman/iruaauth/059a4f/6e7e09eb0a3.pdf