It is well known that vanilla option prices must increase when we increase the implied volatility. Recently, a post on the Wilmott forums wondered about the true accuracy of Peter Jaeckel implied volatility solver, whether it was truely IEEE 754 compliant. In fact, the author noticed some inaccuracy in the option price itself. Unfortunately I can not reply to the forum, its login process does not…
I have implemented a finite difference scheme for pricing options using a Black-Scholes-like model. I tested my implementation on a call option, and found that it gave extremely inaccurate results. I investigated intermediate values in my computations, and I suspect that my inaccurate results are caused by the discontinuity in the payoff function. The payoff function: $$\text{Payoff}(S) = \max(S-…
The research in this post and the related paper on Range Based EGARCH Option pricing Models is focused on the innovative range-based volatility models introduced in Alizadeh, Brandt, and Diebold (2002) (hereafter ABD). We develop new option pricing models using multi-factor diffusion approximations couched within this theoretical framework and examine their properties in comparison with … Contin…
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There’s been a lot of criticism of the Black-Scholes model of late, on our Forum, in our blogs, in the magazine (see Haug & Taleb, Wilmott magazine, January 2008) and in other media. Most is [...]
