Stochastic Volatility Models for Contingent Claim Pricing and Hedging

The present mini-thesis seeks to explore and investigate the mathematical theory and concepts that underpins the valuation of derivative securities, particularly European plainvanilla options. The main argument that we emphasise is that novel models of option pricing, as is suggested by Hull and White (1987) [1] and others, must account for the discrepancy observed on the implied volatility curve. To achieve this we also propose that market volatility be modeled as random or stochastic as opposed to certain standard option pricing models such as Black-Scholes, in which volatility is assumed to be constant.

Grantor dc:publisher.institution

University of the Western Cape

Year dc:date.issued

2008

Author dc:creator

• Manzini, Muzi Charles

Advisor dc:contributor.advisor

• Witbooi, Peter J.

• Contingent Claim
• Hedging
• Brownian Motion
• Black-Scholes Implied Volatility
• Stochastic Volatility
• Call Option Mixture
• Risk-Neutral Pricing
• Equity-linked Pension
• Brennan-Schwartz