EXACT PRICING WITH STOCHASTIC VOLATILITY AND JUMPS

2010 ◽  
Vol 13 (06) ◽  
pp. 901-929 ◽  
Author(s):  
FERNANDA D'IPPOLITI ◽  
ENRICO MORETTO ◽  
SARA PASQUALI ◽  
BARBARA TRIVELLATO
Keyword(s):  
Closed Form ◽  
Stochastic Volatility ◽  
Closed Form Solution ◽  
Exact Algorithm ◽  
Form Solution ◽  
Closed Form Expression ◽  
Barrier Options ◽  
Form Expression ◽  
Variance Swaps ◽  
Jump Diffusion Model

A stochastic volatility jump-diffusion model for pricing derivatives with jumps in both spot return and volatility underlying dynamics is presented. This model admits, in the spirit of Heston, a closed-form solution for European-style options. The structure of the model is also suitable to explicitly obtain the fair delivery price for variance swaps. To evaluate derivatives whose value does not admit a closed-form expression, a methodology based on an "exact algorithm", in the sense that no discretization of equations is required, is developed and applied to barrier options. Goodness of pricing algorithm is tested using DJ Euro Stoxx 50 market data for European options. Finally, the algorithm is applied to compute prices and Greeks for barrier options and to determine the fair delivery prices for variance swaps.

scholarly journals On the Derivation of a Closed-Form Expression for the Solutions of a Subclass of Generalized Abel Differential Equations

2013 ◽  
Vol 2013 ◽  
pp. 1-9
Author(s):  
Panayotis E. Nastou ◽  
Paul Spirakis ◽  
Yannis C. Stamatiou ◽  
Apostolos Tsiakalos
Keyword(s):  
Differential Equation ◽  
General Solution ◽  
Differential Equations ◽  
Closed Form ◽  
Closed Form Solution ◽  
Form Solution ◽  
Closed Form Expression ◽  
Form Expression ◽  
Abel Differential Equations ◽  
Solution Methodology

We investigate the properties of a general class of differential equations described bydy(t)/dt=fk+1(t)y(t)k+1+fk(t)y(t)k+⋯+f2(t)y(t)2+f1(t)y(t)+f0(t),withk>1a positive integer andfi(t), 0≤i≤k+1, withfi(t), real functions oft. Fork=2, these equations reduce to the class ofAbel differential equations of the first kind,for which a standard solution procedure is available. However, fork>2no general solution methodology exists, to the best of our knowledge, that can lead to their solution. We develop a general solution methodology that for odd values ofkconnects the closed form solution of the differential equations with the existence of closed-form expressions for the roots of the polynomial that appears on the right-hand side of the differential equation. Moreover, the closed-form expression (when it exists) for the polynomial roots enables the expression of the solution of the differential equation in closed form, based on the class of Hyper-Lambert functions. However, for certain even values ofk, we prove that such closed form does not exist in general, and consequently there is no closed-form expression for the solution of the differential equation through this methodology.

A CLOSED-FORM PRICING FORMULA FOR EUROPEAN EXCHANGE OPTIONS WITH STOCHASTIC VOLATILITY

2021 ◽  
pp. 1-10
Author(s):  
Puneet Pasricha ◽  
Anubha Goel
Keyword(s):  
Closed Form ◽  
Stochastic Volatility ◽  
Closed Form Solution ◽  
Form Solution ◽  
Stochastic Volatility Model ◽  
Strike Price ◽  
Volatility Model ◽  
Exchange Options ◽  
Pricing Formula ◽  
Exchange Option

This article derives a closed-form pricing formula for the European exchange option in a stochastic volatility framework. Firstly, with the Feynman–Kac theorem's application, we obtain a relation between the price of the European exchange option and a European vanilla call option with unit strike price under a doubly stochastic volatility model. Then, we obtain the closed-form solution for the vanilla option using the characteristic function. A key distinguishing feature of the proposed simplified approach is that it does not require a change of numeraire in contrast with the usual methods to price exchange options. Finally, through numerical experiments, the accuracy of the newly derived formula is verified by comparing with the results obtained using Monte Carlo simulations.

A Closed-Form Solution for Selecting Maximum Critically Damped Actuator Impedance Parameters

2014 ◽  
Vol 137 (4) ◽  
Author(s):  
Nicholas Paine ◽  
Luis Sentis
Keyword(s):  
Closed Form ◽  
Parameter Space ◽  
Real World ◽  
Closed Form Solution ◽  
System Stability ◽  
Limiting Factors ◽  
Closed Form Expression ◽  
Phase Margin ◽  
Form Expression ◽  
Feedback Parameter

This paper introduces a simple and effective method for selecting the maximum feedback gains in PD-type controllers applied to actuators where feedback delay and derivative signal filtering are present. The method provides the maximum feedback parameters that satisfy a phase margin criteria, producing a closed-loop system with high stability and a dynamic response with near-minimum settling time. Our approach is unique in that it simultaneously possesses: (1) a model of real-world performance-limiting factors (i.e., filtering and delay), (2) the ability to meet performance and stability criteria, and (3) the simplicity of a single closed-form expression. A central focus of our approach is the characterization of system stability through exhaustive searches of the feedback parameter space. Using this search-based method, we locate a set of maximum feedback parameters based on a phase margin criteria. We then fit continuous equations to this data and obtain a closed-form expression which matches the sampled data to within 2–4% error for the majority of the parameter space. We apply our feedback parameter selection method to two real-world actuators with widely differing system properties and show that our method successfully produces the maximum achievable nonoscillating impedance response.

scholarly journals A Closed-Form Pricing Formula for Log-Return Variance Swaps under Stochastic Volatility and Stochastic Interest Rate

Mathematics ◽  
2021 ◽  
Vol 10 (1) ◽  
pp. 5
Author(s):  
Mao Chen ◽  
Guanqi Liu ◽  
Yuwen Wang
Keyword(s):  
Interest Rate ◽  
Closed Form ◽  
Hybrid Model ◽  
Approximate Formula ◽  
Closed Form Solution ◽  
Sampling Frequency ◽  
Form Solution ◽  
Variance Swaps ◽  
Return Variance ◽  
Pricing Formula

At present, the study concerning pricing variance swaps under CIR the (Cox–Ingersoll–Ross)–Heston hybrid model has achieved many results ; however, due to the instantaneous interest rate and instantaneous volatility in the model following the Feller square root process, only a semi-closed solution can be obtained by solving PDEs. This paper presents a simplified approach to price log-return variance swaps under the CIR–Heston hybrid model. Compared with Cao’s work, an important feature of our approach is that there is no need to solve complex PDEs; a closed-form solution is obtained by applying the martingale theory and Ito^’s lemma. The closed-form solution is significant because it can achieve accurate pricing and no longer takes time to adjust parameters by numerical method. Another significant feature of this paper is that the impact of sampling frequency on pricing formula is analyzed; then the closed-form solution can be extended to an approximate formula. The price curves of the closed-form solution and the approximate solution are presented by numerical simulation. When the sampling frequency is large enough, the two curves almost coincide, which means that our approximate formula is simple and reliable.

A Closed-Form Solution for the Global Quadratic Hedging of Options under Geometric Gaussian Random Walks

2019 ◽  
Keyword(s):  
Closed Form ◽  
Recursive Algorithm ◽  
Closed Form Solution ◽  
Form Solution ◽  
Closed Form Expression ◽  
Problem Solution ◽  
Underlying Asset ◽  
Quadratic Hedging ◽  
Hedging Problem ◽  
The Impact

This study obtains a closed-form solution for the discrete-time global quadratic hedging problem of Schweizer (1995) applied to vanilla European options under the geometric Gaussian random walk model for the underlying asset. This extends the work of Rémillard and Rubenthaler (2013), who obtained closed-form formulas for some components of the hedging problem solution. Coefficients embedded in the closed-form expression can be computed either directly or through a recursive algorithm. The author also presents a brief sensitivity analysis to determine the impact of the underlying asset drift and the hedging portfolio rebalancing frequency on the optimal hedging capital and the initial hedge ratio.

A Closed-Form Solution for the Eshelby Tensor and the Elastic Field Outside an Elliptic Cylindrical Inclusion

2011 ◽  
Vol 78 (3) ◽  
Author(s):  
Xiaoqing Jin ◽  
Leon M. Keer ◽  
Qian Wang
Keyword(s):  
Closed Form ◽  
Closed Form Solution ◽  
Elastic Field ◽  
Form Solution ◽  
Eshelby Tensor ◽  
Cylindrical Inclusion ◽  
Closed Form Expression ◽  
Equivalent Inclusion Method ◽  
Explicit Analytical Solution ◽  
Present Solution

From the analytical formulation developed by Ju and Sun [1999, “A Novel Formulation for the Exterior-Point Eshelby’s Tensor of an Ellipsoidal Inclusion,” ASME Trans. J. Appl. Mech., 66, pp. 570–574], it is seen that the exterior point Eshelby tensor for an ellipsoid inclusion possesses a minor symmetry. The solution to an elliptic cylindrical inclusion may be obtained as a special case of Ju and Sun’s solution. It is noted that the closed-form expression for the exterior-point Eshelby tensor by Kim and Lee [2010, “Closed Form Solution of the Exterior-Point Eshelby Tensor for an Elliptic Cylindrical Inclusion,” ASME Trans. J. Appl. Mech., 77, p. 024503] violates the minor symmetry. Due to the importance of the solution in micromechanics-based analysis and plane-elasticity-related problems, in this work, the explicit analytical solution is rederived. Furthermore, the exterior-point Eshelby tensor is used to derive the explicit closed-form solution for the elastic field outside the inclusion, as well as to quantify the elastic field discontinuity across the interface. A benchmark problem is used to demonstrate a valuable application of the present solution in implementing the equivalent inclusion method.

scholarly journals Enhancing the electrical and thermal conductivities of polymer composites via curvilinear fibers: An analytical study

2019 ◽  
Vol 24 (10) ◽  
pp. 3231-3253 ◽  
Author(s):  
Marco Salviato ◽  
Sean E Phenisee
Keyword(s):  
Closed Form ◽  
Electric Conductivity ◽  
Electrostatic Potential ◽  
Mechanical Performance ◽  
Transverse Isotropy ◽  
Closed Form Solution ◽  
Transversely Isotropic ◽  
Form Solution ◽  
Closed Form Expression ◽  
Element Analysis

The new generation of manufacturing technologies such as additive manufacturing and automated fiber placement has enabled the development of material systems with desired functional and mechanical properties via particular designs of inhomogeneities and their mesostructural arrangement. Among these systems, particularly interesting are materials exhibiting curvilinear transverse isotropy (CTI), in which the inhomogeneities take the form of continuous fibers following curvilinear paths designed to, for example, optimize the electric and thermal conductivity, and the mechanical performance of the system. In this context, the present work proposes a general framework for the exact, closed-form solution of electrostatic problems in materials featuring CTI. First, the general equations for the fiber paths that optimize the electric conductivity are derived, leveraging a proper conformal coordinate system. Then, the continuity equation for the curvilinear transversely isotropic system is derived in terms of electrostatic potential. A general exact, closed-form expression for the electrostatic potential and electric field is derived and validated by finite element analysis. Finally, potential avenues for the development of materials with superior electric conductivity and damage sensing capabilities are discussed.

scholarly journals DECOMPOSITION FORMULA FOR JUMP DIFFUSION MODELS

2018 ◽  
Vol 21 (08) ◽  
pp. 1850052
Author(s):  
R. MERINO ◽  
J. POSPÍŠIL ◽  
T. SOBOTKA ◽  
J. VIVES
Keyword(s):  
Option Pricing ◽  
Closed Form ◽  
Stochastic Volatility ◽  
Closed Form Solution ◽  
Form Solution ◽  
Heston Model ◽  
Approximation Formula ◽  
Option Prices ◽  
Currency Options ◽  
Decomposition Formula

In this paper, we derive a generic decomposition of the option pricing formula for models with finite activity jumps in the underlying asset price process (SVJ models). This is an extension of the well-known result by Alòs [(2012) A decomposition formula for option prices in the Heston model and applications to option pricing approximation, Finance and Stochastics 16 (3), 403–422, doi: https://doi.org/10.1007/s00780-012-0177-0 ] for Heston [(1993) A closed-form solution for options with stochastic volatility with applications to bond and currency options, The Review of Financial Studies 6 (2), 327–343, doi: https://doi.org/10.1093/rfs/6.2.327 ] SV model. Moreover, explicit approximation formulas for option prices are introduced for a popular class of SVJ models — models utilizing a variance process postulated by Heston [(1993) A closed-form solution for options with stochastic volatility with applications to bond and currency options, The Review of Financial Studies 6 (2), 327–343, doi: https://doi.org/10.1093/rfs/6.2.327 ]. In particular, we inspect in detail the approximation formula for the Bates [(1996), Jumps and stochastic volatility: Exchange rate processes implicit in Deutsche mark options, The Review of Financial Studies 9 (1), 69–107, doi: https://doi.org/10.1093/rfs/9.1.69 ] model with log-normal jump sizes and we provide a numerical comparison with the industry standard — Fourier transform pricing methodology. For this model, we also reformulate the approximation formula in terms of implied volatilities. The main advantages of the introduced pricing approximations are twofold. Firstly, we are able to significantly improve computation efficiency (while preserving reasonable approximation errors) and secondly, the formula can provide an intuition on the volatility smile behavior under a specific SVJ model.

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