Local volatility model applied to BIST30 european warrants: pricing and hedging

Date

2016

Author

Kirazoğlu, Zekiye Sıla

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One of the basic observations on pricing options is that the assumption of constant volatility does not agree with data and market price data gives a volatility smile that depends on maturities and strike prices. The ﬁrst model that developed to be compatible with this observation is the local volatility model. The purpose of this work is to study the performance of the local volatility model on BIST30 warrants and compare it to the standard Black Scholes model. To estimate the local volatility model from data two approaches are used: 1) we estimate the local volatility directly from the underlying data (in this approach we make two assumptions: a) the local volatility depends only on the price of the underlying b) the local volatility is a piecewise linear function) 2)ﬁrst a Heston model is ﬁt to option prices and we use Dupire’s formula to derive the implied local volatiliy model.

Subject Keywords

Pricing., Hedge funds., Stock warrants., Stock exchanges.

URI

http://etd.lib.metu.edu.tr/upload/12620436/index.pdf
https://hdl.handle.net/11511/26032

Collections

Graduate School of Applied Mathematics, Thesis

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Citation Formats

Z. S. Kirazoğlu, “Local volatility model applied to BIST30 european warrants: pricing and hedging,” M.S. - Master of Science, Middle East Technical University, 2016.