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Modeling fx options in presence of stochastic volatility with overnight-indexed-swap-discounting
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index.pdf
Date
2019
Author
Tekten, Selin
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This study investigates the time contingent behavior of risk factor USDTRY. Option pricing models Black-Scholes and Heston has been utilized to estimate the behavior. The adjusted Black-Sholes model is the current market practice to model USDTRY risk factor. Market practitioners do not prefer to use constant volatility in the Black-Scholes Model, which violates the model assumption. They instead interpolate the volatility surface from market data of implied volatilities and use them in Black-Scholes Model. However, Heston model admits varying volatilities. The Heston Model adds a dimension to the Black-Scholes model by letting the volatility to be a stochastic process. In this thesis, we have used interpolated volatility surface as a benchmark for testing the results estimated by the Heston Model. Furthermore, while estimating option prices, Overnight-Indexed-Swap (OIS) discounting framework has been governed to achieve risk-free rates. The test results have indicated that Heston stochastic volatility model with OIS discounting offers arbitrage-free pricing with similar computation efficiency to the benchmark.
Subject Keywords
Options (Finance)
,
Options (Finance) Prices
,
Options (Finance) Prices Mathematical models.
,
Currency Options
,
USDTRY
,
Heston Model
,
Overnight-Indexed-Swap Discounting
,
Volatility Surface
URI
http://etd.lib.metu.edu.tr/upload/12624997/index.pdf
https://hdl.handle.net/11511/45325
Collections
Graduate School of Applied Mathematics, Thesis
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S. Tekten, “Modeling fx options in presence of stochastic volatility with overnight-indexed-swap-discounting,” Thesis (M.S.) -- Graduate School of Applied Mathematics. Financial Mathematics., Middle East Technical University, 2019.