Yuan Yang

Abstract

In spite of the Black-Scholes (BS) equation being widely used to price options, this method is based on a hypothesis that the volatility of the underlying is a constant. A number of scholars began to improve the formula, and they proposed to employ stochastic volatility models to predict the behavior of the volatility. One of the results of the improvement is stochastic volatility models, which replaces the fixed volatility by a stochastic volatility process. The purpose of this dissertation is to adopt one of the famous stochastic volatility models, Heston Model (1993), to price European call options. Put option values can easily obtained by call-put parity if it is needed. We derive a model based on the Heston model. Then, we compare it with Black-Scholes equation, and make a sensitivity analysis for its parameters.

Library of Congress Subject Headings

Options (Finance)--Prices--Mathematical models; Investment analysis--Mathematics; Stochastic processes

Publication Date

5-10-2013

Document Type

Thesis

Department, Program, or Center

School of Mathematical Sciences (COS)

Advisor

Brooks, Bernard

Comments

Note: imported from RIT’s Digital Media Library running on DSpace to RIT Scholar Works. Physical copy available through RIT's The Wallace Library at: HG6024 .Y36 2013

Campus

RIT – Main Campus

Plan Codes

ACMTH-MS

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