The vanna - volga method for derivatives pricing
This Master thesis highlights some basic features and applications of the vanna-volga method and its accuracy when pricing plain vanillas and simple barrier options. In the paper we derive formulas for premiums of vanilla FX options using two versions of the vanna-volga method – the exact vanna-volga method and the simplified vanna-volga method. We review a very common vanna-volga variation used to price the first-generation exotics and the application of the vanna-volga method to construct the implied volatility surface. Furthermore, we briefly discuss a popular stochastic volatility model that aims to take the smile effect into account – the Heston model. Its accuracy and efficiency is further compared with that of the vanna-volga method. In the part of the thesis, which is devoted to calibration results, we compare the results obtained by the exact vanna-volga method, the simplified vanna-volga method and the Heston model. We also investigate the accuracy of the vanna-volga method applied to barrier options. All the plots and graphs in this thesis were produced by programs implemented by the author in MATLAB. These programs are available on request.
|Date of creation:||Jul 2011|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Janek, Agnieszka & Kluge, Tino & Weron, Rafal & Wystup, Uwe, 2010.
"FX Smile in the Heston Model,"
25491, University Library of Munich, Germany.
- Agnieszka Janek & Tino Kluge & Rafal Weron & Uwe Wystup, 2010. "FX Smile in the Heston Model," HSC Research Reports HSC/10/02, Hugo Steinhaus Center, Wroclaw University of Technology.
- Agnieszka Janek & Tino Kluge & RafaÅ‚ Weron & Uwe Wystup, 2010. "FX Smile in the Heston Model," SFB 649 Discussion Papers SFB649DP2010-047, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Agnieszka Janek & Tino Kluge & Rafal Weron & Uwe Wystup, 2010. "FX Smile in the Heston Model," Papers 1010.1617, arXiv.org.
- John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Theory Of Valuation, chapter 5, pages 129-164 World Scientific Publishing Co. Pte. Ltd..
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
- Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:36127. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.