Certain exotic options cannot be valued using closed-form solutions or even by numerical methods assuming constant volatility. Many exotics are priced in a local volatility framework. Pricing under local volatility has become a field of extensive research in finance, and various models are...

We address a number of technical problems with the popular Practitioner Black-Scholes (PBS) method for valuing options. The method amounts to a two-stage procedure in which fitted values of implied volatilities (IV) from a linear regression are plugged into the Black-Scholes formula to obtain...

A contingent claims valuation model which allows to highlight the implications of program trading in spot markets for the pricing of European-style foreign currency options and for the volatility strike structure implicit in these contracts is devoloped. The curvature of the volatility strike...

The effectiveness of the foreign exchange market interventions conducted by the Deutsche Bundesbank during the Louvre period to alter either the level or the volatility of the $/DM spot rate is examined. Volatility quotes implicit in foreign currency options are employed to recover the impact of...

This paper presents an option positioning that allows us to infer forward variances from option portfolios. The forward variances we construct from equity index options help to predict (i) growth in measures of real economic activity, (ii) Treasury bill returns, (iii) stock market returns, and...

When the pricing kernel is U-shaped, then expected returns of claims with payout on the upside are negative for strikes beyond a threshold, determined by the slope of the U-shaped kernel in its increasing region, and have negative partial derivative with respect to strike in the increasing...

This paper proposes a new method for pricing American options that uses importance sampling to reduce estimator bias and variance in simulation-and-regression based methods. Our suggested method uses regressions under the importance measure directly, instead of under the nominal measure as is...

Recently it was shown that the estimated American call prices obtained with regression and simulation based methods can be significantly improved on by using put-call symmetry. This paper extends these results and demonstrates that it is also possible to significantly reduce the variance of the...

Investment decisions usually involve the assessment of more than one financial asset or investment project (real asset). The most appropriate way to analyze the viability of a real asset is not to study it in isolation but as part of a portfolio with correlations between the input variables of...

In this paper, we evaluate American-style, path-dependent derivatives with an artificial intelligence technique. Specifically, we use swarm intelligence to find the optimal exercise boundary for an American-style derivative. Swarm intelligence is particularly efficient (regarding computation and...