Pricing joint claims on an asset and its realized variance under stochastic volatility models
AbstractIn a stochastic volatility framework, we find a general pricing equation for the class of payoffs depending on the terminal value of a market asset and its final quadratic variation. This allows a pricing tool for European-style claims paying off at maturity a joint function of the underlying and its realised volatility/variance. We study the solution under different stochastic volatility models, give a formula for the computation of the Delta and Gamma of these claims, and introduce some new interesting payoffs that can be priced through this equation. Numerical results are given and compared to those from plain vanilla derivatives.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1206.2112.
Date of creation: Jun 2012
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
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- Bergman, Yaacov Z & Grundy, Bruce D & Wiener, Zvi, 1996. " General Properties of Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1573-1610, December.
- Alan L. Lewis, 2000. "Option Valuation under Stochastic Volatility," Option Valuation under Stochastic Volatility, Finance Press, number ovsv, July.
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