A huge number of financial institutions and companies use the options in risk management. A particularly important issue that arises when it comes to options is fixing their value. In this paper we present the classical models for valuing options: Black-Scholes model and binomial model....

The volatility estimation is a crucial problem for pricing derivatives. The traditional implied volatility approach induces the undesired smile effect and is therefore inconsistent with the market reality. A second more realistic approach is due to Bensoussan, Crouhy and Galai (1995) who derive...

We develop a new approach to approximating asset prices in the context of continuous-time models. For any pricing model that lacks a closed-form solution, we provide a closed-form approximate solution, which relies on the expansion of the intractable model around an “auxiliary” one. We...

Estimation of volatility of financial time series plays a crucial role in pricing derivatives. Volatility is often estimated from historical data; however, it is well known that volatility varies in time. We propose a method to choose a suitable length of historical data to estimate contemporary...

A szerző a pénzügyi matematika pénzügyi módszerekkel csökkenthető kockázatainak nagyságát próbálja matematikai megfontolásokkal meghatározni. A matematikai pénzügyek legegyszerűbb állításait ismerteti, diszkrét, véges időhorizont esetén be látja az eszközárazás első...

The "Masters Hypothesis" is the claim that unprecedented buying pressure from new financial index investors created a massive bubble in agricultural futures prices at various times in recent years. This paper analyzes the market impact of financial index investment in agricultural futures...

We examine the joint predictability of return and cash flow within a present value framework, by imposing the implications from a long-run risk model that allow for both time-varying volatility and volatility uncertainty. We provide new evidence that the expected return variation and the...

Principal component analysis of equity options on Dow-Jones firms reveals a strong factor structure. The first principal component explains 77% of the variation in the equity volatility level, 77% of the variation in the equity option skew, and 60% of the implied volatility term structure across...