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Option Pricing Problems in Variational Formulation

Identifikátory výsledku

  • Kód výsledku v IS VaVaI

    <a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F49777513%3A23510%2F17%3A43932863" target="_blank" >RIV/49777513:23510/17:43932863 - isvavai.cz</a>

  • Výsledek na webu

  • DOI - Digital Object Identifier

Alternativní jazyky

  • Jazyk výsledku

    angličtina

  • Název v původním jazyce

    Option Pricing Problems in Variational Formulation

  • Popis výsledku v původním jazyce

    This chapter deals with variational formulation of option pricing problems. Author start from the well-known case, the Black-Scholes model for a put option with strike price and maturity given, which assumes the underlying asset to follow a geometric Brownian motion. This problem provides a reasonable basic framework to follow basic steps of derivation of variational formulation of option pricing problem. In general, variational formulation consists of finding a continuous function defined on the time interval with the values in a properly defined functional space. Finite element method applied to option pricing problem in finance yields usually a system of ordinary differential equations if discretization process applies to space domain of underlying asset only. Pricing American options requires, due to the early exercise feature of such derivative contracts, the solution of optimal stopping problems for the price process. Unlike in the European case, the pricing function of an American option does not satisfy a partial differential equation, but a partial differential inequality, or a system of inequalities. Recasting such problem into a variational inequality problem is the next step, which is given in detail. Author mentions briefly the functional space which provides natural framework for weak formulation of American put option pricing problem. Both optimal exercise boundary and additive decomposition of American put option are discussed, as well. Finally, numerical solution of 2-D basket European put option pricing problem is discussed in detail. Author concerns with influence of various parameters upon the option price, with the correlation structure of underlying assets in particular. The details of FreeFem++ code are revealed, too.

  • Název v anglickém jazyce

    Option Pricing Problems in Variational Formulation

  • Popis výsledku anglicky

    This chapter deals with variational formulation of option pricing problems. Author start from the well-known case, the Black-Scholes model for a put option with strike price and maturity given, which assumes the underlying asset to follow a geometric Brownian motion. This problem provides a reasonable basic framework to follow basic steps of derivation of variational formulation of option pricing problem. In general, variational formulation consists of finding a continuous function defined on the time interval with the values in a properly defined functional space. Finite element method applied to option pricing problem in finance yields usually a system of ordinary differential equations if discretization process applies to space domain of underlying asset only. Pricing American options requires, due to the early exercise feature of such derivative contracts, the solution of optimal stopping problems for the price process. Unlike in the European case, the pricing function of an American option does not satisfy a partial differential equation, but a partial differential inequality, or a system of inequalities. Recasting such problem into a variational inequality problem is the next step, which is given in detail. Author mentions briefly the functional space which provides natural framework for weak formulation of American put option pricing problem. Both optimal exercise boundary and additive decomposition of American put option are discussed, as well. Finally, numerical solution of 2-D basket European put option pricing problem is discussed in detail. Author concerns with influence of various parameters upon the option price, with the correlation structure of underlying assets in particular. The details of FreeFem++ code are revealed, too.

Klasifikace

  • Druh

    C - Kapitola v odborné knize

  • CEP obor

  • OECD FORD obor

    10201 - Computer sciences, information science, bioinformathics (hardware development to be 2.2, social aspect to be 5.8)

Návaznosti výsledku

  • Projekt

    <a href="/cs/project/GA15-20405S" target="_blank" >GA15-20405S: Modelování procesů na finančních trzích a predikce bankrotu firem aparátem reálných opcí</a><br>

  • Návaznosti

    P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)

Ostatní

  • Rok uplatnění

    2017

  • Kód důvěrnosti údajů

    S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Údaje specifické pro druh výsledku

  • Název knihy nebo sborníku

    Advanced Methods of Computational Finance

  • ISBN

    978-80-245-2207-4

  • Počet stran výsledku

    33

  • Strana od-do

    77-109

  • Počet stran knihy

    239

  • Název nakladatele

    University of Economics, Prague, Oeconomica Publishing House

  • Místo vydání

    Prague

  • Kód UT WoS kapitoly