A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options
@article{Heston1993ACS, title={A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options}, author={Steven Heston}, journal={Review of Financial Studies}, year={1993}, volume={6}, pages={327-343} }
I use a new technique to derive a closed-form solution for the price of a European call option on an asset with stochastic volatility. The model allows arbitrary correlation between volatility and spot-asset returns. I introduce stochastic interest rates and show how to apply the model to bond options and foreign currency options. Simulations show that correlation between volatility and the spot asset's price is important for explaining return skewness and strike-price biases in the Black… CONTINUE READING
7,381 Citations
Pricing currency options in the presence of time-varying volatility and non-normalities
- Economics
- 2006
- 14
- Highly Influenced
- PDF
A Closed-Form Solution for Outperformance Options with Stochastic Correlation and Stochastic Volatility
- Economics
- 2015
- 5
- Highly Influenced
Pricing American options on foreign currency with stochastic volatility, jumps, and stochastic interest rates
- Economics
- 2007
- 8
On the pricing of forward starting options in Heston’s model on stochastic volatility
- Computer Science, Economics
- Finance Stochastics
- 2005
- 66
References
SHOWING 1-10 OF 45 REFERENCES
Stock Price Distributions with Stochastic Volatility: An Analytic Approach
- Economics
- 1991
- 1,462
- Highly Influential
Forecasting Stock-Return Variance: Toward an Understanding of Stochastic Implied Volatilities
- Economics
- 1993
- 591
Option Pricing when the Variance Changes Randomly: Theory, Estimation, and an Application
- Economics, Business
- 1987
- 999
- PDF