Pricing holder-extendable call options with mean-reverting stochastic volatility
Options with extendable features have many applications in finance and these provide the motivation for this study. The pricing of extendable options when the underlying asset follows a geometric Brownian motion with constant volatility has appeared in the literature. In this paper, we consider hold...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
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Cambridge University Press
2015
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| Online Access: | http://psasir.upm.edu.my/id/eprint/46000/ http://psasir.upm.edu.my/id/eprint/46000/1/Pricing%20holder-extendable%20call%20options%20with%20mean-reverting%20stochastic%20volatility.pdf |
| _version_ | 1848850575712583680 |
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| author | Ibrahim, Siti Nur Iqmal Hernandez, A. Diaz O'Hara, John G. Constantinou, Nick |
| author_facet | Ibrahim, Siti Nur Iqmal Hernandez, A. Diaz O'Hara, John G. Constantinou, Nick |
| author_sort | Ibrahim, Siti Nur Iqmal |
| building | UPM Institutional Repository |
| collection | Online Access |
| description | Options with extendable features have many applications in finance and these provide the motivation for this study. The pricing of extendable options when the underlying asset follows a geometric Brownian motion with constant volatility has appeared in the literature. In this paper, we consider holder-extendable call options when the underlying asset follows a mean-reverting stochastic volatility. The option price is expressed in integral forms which have known closed-form characteristic functions. We price these options using a fast Fourier transform, a finite difference method and Monte Carlo simulation, and we determine the efficiency and accuracy of the Fourier method in pricing holder-extendable call options for Heston parameters calibrated from the subprime crisis. We show that the fast Fourier transform reduces the computational time required to produce a range of holder-extendable call option prices by at least an order of magnitude. Numerical results also demonstrate that when the Heston correlation is negative, the Black–Scholes model under-prices in-the-money and over-prices out-of-the-money holder-extendable call options compared with the Heston model, which is analogous to the behaviour for vanilla calls. |
| first_indexed | 2025-11-15T10:08:28Z |
| format | Article |
| id | upm-46000 |
| institution | Universiti Putra Malaysia |
| institution_category | Local University |
| language | English |
| last_indexed | 2025-11-15T10:08:28Z |
| publishDate | 2015 |
| publisher | Cambridge University Press |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | upm-460002022-05-31T20:46:46Z http://psasir.upm.edu.my/id/eprint/46000/ Pricing holder-extendable call options with mean-reverting stochastic volatility Ibrahim, Siti Nur Iqmal Hernandez, A. Diaz O'Hara, John G. Constantinou, Nick Options with extendable features have many applications in finance and these provide the motivation for this study. The pricing of extendable options when the underlying asset follows a geometric Brownian motion with constant volatility has appeared in the literature. In this paper, we consider holder-extendable call options when the underlying asset follows a mean-reverting stochastic volatility. The option price is expressed in integral forms which have known closed-form characteristic functions. We price these options using a fast Fourier transform, a finite difference method and Monte Carlo simulation, and we determine the efficiency and accuracy of the Fourier method in pricing holder-extendable call options for Heston parameters calibrated from the subprime crisis. We show that the fast Fourier transform reduces the computational time required to produce a range of holder-extendable call option prices by at least an order of magnitude. Numerical results also demonstrate that when the Heston correlation is negative, the Black–Scholes model under-prices in-the-money and over-prices out-of-the-money holder-extendable call options compared with the Heston model, which is analogous to the behaviour for vanilla calls. Cambridge University Press 2015 Article PeerReviewed text en http://psasir.upm.edu.my/id/eprint/46000/1/Pricing%20holder-extendable%20call%20options%20with%20mean-reverting%20stochastic%20volatility.pdf Ibrahim, Siti Nur Iqmal and Hernandez, A. Diaz and O'Hara, John G. and Constantinou, Nick (2015) Pricing holder-extendable call options with mean-reverting stochastic volatility. The ANZIAM Journal, 61 (4). pp. 382-397. ISSN 1446-1811; ESSN: 1446-8735 https://www.cambridge.org/core/journals/anziam-journal/article/pricing-holderextendable-call-options-with-meanreverting-stochastic-volatility/44F8FB787C2FC522430403AB9A740737 10.1017/S1446181119000142 |
| spellingShingle | Ibrahim, Siti Nur Iqmal Hernandez, A. Diaz O'Hara, John G. Constantinou, Nick Pricing holder-extendable call options with mean-reverting stochastic volatility |
| title | Pricing holder-extendable call options with mean-reverting stochastic volatility |
| title_full | Pricing holder-extendable call options with mean-reverting stochastic volatility |
| title_fullStr | Pricing holder-extendable call options with mean-reverting stochastic volatility |
| title_full_unstemmed | Pricing holder-extendable call options with mean-reverting stochastic volatility |
| title_short | Pricing holder-extendable call options with mean-reverting stochastic volatility |
| title_sort | pricing holder-extendable call options with mean-reverting stochastic volatility |
| url | http://psasir.upm.edu.my/id/eprint/46000/ http://psasir.upm.edu.my/id/eprint/46000/ http://psasir.upm.edu.my/id/eprint/46000/ http://psasir.upm.edu.my/id/eprint/46000/1/Pricing%20holder-extendable%20call%20options%20with%20mean-reverting%20stochastic%20volatility.pdf |