Journal ArticleDOI
Robust Replication of Volatility Derivatives
Peter Carr,Roger Lee +1 more
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In this paper, the authors focus on the pricing and hedging of derivatives written on the realized variance of an underlying asset, and use a nonparametric approach which takes prices of coterminal Eureopan options on the underlying asset as given.Abstract:
We focus on the pricing and hedging of derivatives written on the realized variance of an underlying asset. The set of payoffs included in our methodology include volatility swaps and options on realized variance. Rather than specify a parametric model, we use a nonparamtric approach which takes prices of coterminal Eureopan options on the underlying asset as given.read more
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Journal ArticleDOI
Variance Risk Premia
Peter Carr,Liuren Wu +1 more
TL;DR: In this article, a method for quantifying the variance risk premium on financial assets is proposed, which theoretically and numerically shows that the risk-neutral expected value of the return variance, also known as the variance swap rate, is well approximated by the value of a particular portfolio of options.
Journal ArticleDOI
The effect of jumps and discrete sampling on volatility and variance swaps
Mark Broadie,Ashish Jain +1 more
TL;DR: In this article, the effect of discrete sampling and asset price jumps on fair variance and volatility swap strikes is investigated in different models of the underlying evolution of the asset price: the Black-Scholes model, the Heston stochastic volatility model, and the Merton jump-diffusion model.
Journal ArticleDOI
Can the evolution of implied volatility be forecasted? Evidence from European and US implied volatility indices
TL;DR: In this paper, the authors address the question whether the evolution of implied volatility can be forecasted by studying a number of European and US implied volatility indices, both point and interval forecasts are formed by alternative model specifications.
Journal ArticleDOI
An empirical comparison of continuous-time models of implied volatility indices
TL;DR: In this paper, the authors explore the ability of alternative popular continuous-time diffusion and jump-diffusion processes to capture the dynamics of implied volatility indices over time and evaluate the performance of the various models under both econometric and financial metrics.
Book
FX Options and Structured Products
TL;DR: In this article, the authors present a tour of the history of the options market and a case study of the Forward Plus and Bid-Ask Spreads for the first generation exotic options.
References
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Journal ArticleDOI
The Pricing of Options and Corporate Liabilities
Fischer Black,Myron S. Scholes +1 more
TL;DR: In this paper, a theoretical valuation formula for options is derived, based on the assumption that options are correctly priced in the market and it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks.
Journal ArticleDOI
A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options
TL;DR: In this paper, a closed-form solution for the price of a European call option on an asset with stochastic volatility is derived based on characteristi c functions and can be applied to other problems.
Journal ArticleDOI
The Pricing of Options on Assets with Stochastic Volatilities
John Hull,Alan White +1 more
TL;DR: In this article, the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price, and the solution of this differential equation is independent if (a) the volatility is a traded asset or (b) volatility is uncorrelated with aggregate consumption, if either of these conditions holds, the risk-neutral valuation arguments of Cox and Ross [4] can be used in a straightfoward way.
Journal ArticleDOI
Empirical Performance of Alternative Option Pricing Models
TL;DR: In this article, an option pricing model that allows volatility, interest rates and jumps to be stochastic is presented. But it is not known whether and by how much each generalization improves option pricing and hedging.
Posted Content
Prices of State-Contingent Claims Implicit in Option Prices
TL;DR: In this article, the authors derive the prices of primitive securities from call options on aggregate consumption, and derive an equilibrium valuation of assets with uncertain payoffs at many future dates by using the Black-Scholes equation.