Pricing Collar Options with Stochastic Volatility
Pengshi Li, Jianhui Yang
Discrete Dynamics in Nature and Society · 2017
doi:10.1155/2017/9673630 (opens in a new tab)
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Abstract
This paper studies collar options in a stochastic volatility economy. The underlying asset price is assumed to follow a continuous geometric Brownian motion with stochastic volatility driven by a mean-reverting process. The method of asymptotic analysis is employed to solve the PDE in the stochastic volatility model. An analytical approximation formula for the price of the collar option is derived. A numerical experiment is presented to demonstrate the results.
Abstract licence: CC BY
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