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}
}
  • Steven Heston
  • Published 1993
  • Economics
  • Review of Financial Studies
  • 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

    Figures and Tables from this paper

    Pricing currency options in the presence of time-varying volatility and non-normalities
    • 14
    • Highly Influenced
    • PDF
    A Closed-Form Solution for Outperformance Options with Stochastic Correlation and Stochastic Volatility
    • 5
    • Highly Influenced
    A Simple Model for Option Pricing with Jumping Stochastic Volatility
    • 15
    • PDF
    Exact Pricing with Stochastic Volatility and Jumps
    • 10
    • Highly Influenced
    On the pricing of forward starting options in Heston’s model on stochastic volatility
    • 66

    References

    SHOWING 1-10 OF 45 REFERENCES
    The Pricing of Options on Assets with Stochastic Volatilities
    • 3,969
    • PDF
    Pricing foreign currency options with stochastic volatility
    • 780
    Stock Price Distributions with Stochastic Volatility: An Analytic Approach
    • 1,462
    • Highly Influential
    Option values under stochastic volatility: Theory and empirical estimates
    • 887
    • PDF
    Options, Futures, and Other Derivatives
    • 6,593
    • Highly Influential
    • PDF
    Option Pricing when the Variance Changes Randomly: Theory, Estimation, and an Application
    • 999
    • PDF
    Foreign currency option values
    • 819
    The pricing of foreign currency options
    • 72