Research Article
The Performance of the Stochastic Volatility Model: Pricing for Floating Strike Lookback Option
@INPROCEEDINGS{10.4108/eai.28-10-2022.2328399, author={Duoshu Xu}, title={The Performance of the Stochastic Volatility Model: Pricing for Floating Strike Lookback Option}, proceedings={Proceedings of the International Conference on Financial Innovation, FinTech and Information Technology, FFIT 2022, October 28-30, 2022, Shenzhen, China}, publisher={EAI}, proceedings_a={FFIT}, year={2023}, month={4}, keywords={stochastical volatility model; option pricing; lookback option; heston model}, doi={10.4108/eai.28-10-2022.2328399} }- Duoshu Xu
Year: 2023
The Performance of the Stochastic Volatility Model: Pricing for Floating Strike Lookback Option
FFIT
EAI
DOI: 10.4108/eai.28-10-2022.2328399
Abstract
Derivative securities help investors to increase their expected returns and minimize the risks of their exposure when used correctly. Different ideas are proposed to offer influence as well as insurance for the risk averse investors. The investors may face problems in pricing of the exotic options in finance, which do not have analytic solutions under stochastic volatility model. Hence, it becomes difficult to calculate option prices and a lot of time is taken to solve and compute the problems. This study shows the required theoretical frameworks which should be embraced by practitioners for price estimation options. Specifically, this thesis will mainly focus on pricing for floating strike lookback and testing option pricing formulae using the Heston stochastic volatility model, which will be used in defining as well as simulate the asset volatility stochastic process to in Heston model of the Euler discretization is used to estimate the paths of variance processes on discretize grid and the stock price. The method of pricing majorly depends on partial differentiation equation approach on Heston stochastic volatility model. Overall, these results shed light on option pricing under uncertainty.
