Parameter Estimation of Local Volatility in Currency Option Valuation
2016
In quantitative finance and option pricing, one of the basic determinants of option
prices is the volatility of the underlying asset. In this paper, we therefore, present a concise study
of volatility in option pricing in the sense of Dupire’s approach. Thereafter, we outspread such
study via the application of Ito formula to the modelling and valuation of currency option with
local volatility.
For the purpose of efficiency, we use the daily historical prices of stock-S&P 500 for a certain
period to estimate the corresponding historical volatility. Graphical representation of the
analysed daily historical data of stock prices with respect to a local volatility is presented
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