Expansion Method for Pricing Foreign Exchange Options Under Stochastic Volatility and Interest Rates
Some expansion methods have been proposed for approximately pricing options which has no exact closed formula. Benhamou et al. (2010) presents the smart expansion method that directly expands the expectation value of payoff function with respect to the volatility of volatility, then uses it to price options in the stochastic volatility model. In this paper, we apply their method to the stochastic volatility model with stochastic interest rates, and present the expansion formula for pricing options up to the second order. Then the numerical studies are performed to compare our approximation formula with the Monte-Carlo simulation. It is found that our formula shows the numerically comparable results with the method proposed by Grzelak et al. (2012) which uses the approximation of characteristic function
Year of publication: |
2019
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Authors: | Nagami, Kenji |
Publisher: |
[2019]: [S.l.] : SSRN |
Subject: | Stochastischer Prozess | Stochastic process | Volatilität | Volatility | Optionspreistheorie | Option pricing theory | Währungsderivat | Currency derivative | Zins | Interest rate |
Saved in:
freely available
Extent: | 1 Online-Ressource (20 p) |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments August 26, 2019 erstellt |
Other identifiers: | 10.2139/ssrn.3443310 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10012864085
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