Pricing and hedging exotic options in stochastic volatility models

Chen, Zhanyu (2013) Pricing and hedging exotic options in stochastic volatility models. PhD thesis, London School of Economics and Political Science.

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Abstract

This thesis studies pricing and hedging barrier and other exotic options in continuous stochastic volatility models. Classical put-call symmetry relates the price of puts and calls under a suitable dual market transform. One well-known application is the semi-static hedging of path-dependent barrier options with European options. This, however, in its classical form requires the price process to observe rather stringent and unrealistic symmetry properties. In this thesis, we provide a general self-duality theorem to develop pricing and hedging schemes for barrier options in stochastic volatility models with correlation. A decomposition formula for pricing barrier options is then derived by Ito calculus which provides an alternative approach rather than solving a partial differential equation problem. Simulation on the performance is provided. In the last part of the thesis, via a version of the reflection principle by Desire Andre, originally proved for Brownian motion, we study its application to the pricing of exotic options in a stochastic volatility context.

Item Type:	Thesis (PhD)
Additional Information:	© 2013 Zhanyu Chen
Library of Congress subject classification:	B Philosophy. Psychology. Religion > BC Logic
Sets:	Departments > Philosophy, Logic and Scientific Method
Supervisor:	Dassios, Angelos and Rheinlander, Thorsten
URI:	http://etheses.lse.ac.uk/id/eprint/822

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