Pricing and Hedging Options under Stochastic Volatility
نویسنده
چکیده
In this essay, I mainly discuss how to price and hedge options in stochastic volatility (SV) models. The market is incomplete in the SV model, whereas it is complete in the Black-Scholes model. Thus the option pricing and hedging methods are a little different for the SV model and for the Black-Scholes model. The no-arbitrage argument and the risk-neutral valuation method are two general methods for pricing options. Both methods can be applied to the SV model. Heston’s SV model is discussed in more details, since it is the most popular SV model in practice. I also implement Heston’s model and investigate the effects of the model parameters by looking at the pricing results.
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