Most of the empirical studies on stochastic volatility dynamics favor the 3/2 specification over the square-root (CIR) process in the Heston model. In the context of option pricing, the 3/2 stochastic volatility model is reported to be able to capture the volatility skew evolution better than...

I examine accuracy and robustness of European spread option pricing method of Hurd and Zhou (2010) for European spread options. This method approximates an indefinite bivariate integral by a sum over a uniform grid and the method's accuracy varies greatly depending on the choice of truncation...

The main objective of this paper is to present an algorithm of pricing perpetual American put options with asset-dependent discounting. The value function of such an instrument can be described as VωAPut(s)=supτ∈TEs[e−∫0τω(Sw)dw(K−Sτ)+], where T is a family of stopping times, ω is...

We show that a dynamic model of investment and capital structure choices, where the firm faces real and financial frictions, can generate option prices and implied volatilities that are in line with those of the average optionable stock. As the balance between the fundamental economic forces...

This paper improves continuous-time variance swap approximation formulas to derive exact returns on benchmark VIX option portfolios. The new methodology preserves the variance swap interpretation that decomposes returns into realized variance and option implied-variance.We apply this new...

With the transitions to overnight benchmarks as the main benchmarks in some currencies, futures based on overnight rates are becoming more common. The most traded futures on overnight rates settle against compounded rates. The pricing of those futures requires some convexity adjustments with an...

A simple option pricing model is suggested based on correlation of underlying stock with actual market behavior as reflected by market index, thereby market factor coefficient to enable the traders to quote the prices. The simplicity and ease of the proposed model may appeal to the traders,...

This study develops a quasi-closed-form solution for the valuation of an American put option and the critical price of the underlying asset. This is an important area of research both because of a large number of transactions for American put options on different underlying assets (stocks,...

I document a sizeable bias that might arise when valuing out of the money American options via the Least Square Method proposed by Longstaff and Schwartz (2001). The key point of this algorithm is the regression-based estimate of the continuation value of an American option. If this regression...

This paper presents a simulation study of hedging long-dated futures options, in the Rabinovitch (1989) model which assumes correlated dynamics between spot asset prices and interest rates. Under this model and when the maturity of the hedging instruments match the maturity of the option,...