Article

A Mean-Reverting Stochastic Volatility Option-Pricing Model With An Analytic Solution

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Abstract

In this paper we derive a closed form approximation to a stochastic volatility option-pricing model and propose a variant of EGARCH for parameter estimation. The model thereby provides a consistent approach to the problem of option pricing and parameter estimation. Using Swedish stocks, the model provides a good fit to the heteroscedasticity prevalent in the time-series. The stochastic volatility model also prices options on the underlying stock more accurately than the traditional Black-Scholes formula. This result holds for both historic and implied volatility. A large part of the volatility smile that is observed for options of different maturity and exercise prices is thereby explained.

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Article
The purpose of this paper is to investigate the freight option pricing problem. In this paper we set up the theoretical framework for the valuation of options traded in the freight derivatives market. The option price is determined in series form for the case in which the stochastic volatility is independent of the freight. Numerical solutions are also produced for the case in which the volatility is correlated with the freight. In a Monte Carlo experiment we show that our formula gives accurate prices.
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