Both deterministic and stochastic volatility models have been used to price and hedge European options. Observation of real market data suggests that volatility, while stochastic, is well modelled to alternate between just two states. We consider a set of coupled pricing partial differential...

To bridge the gap between the output of theoretical option pricing models and observed option prices on exchanges, it is necessary to price the volatility risk inherent in financial markets. Non zero market risk premia have been found in previous financial literature through an exploration of...