The simulation of option prices with application to London International Financial Futures Exchange options on futures

The simulation of option prices with application to London International Financial Futures Exchange options on futures

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Article ID: iaor20001594
Country: Netherlands
Volume: 114
Issue: 2
Start Page Number: 249
End Page Number: 262
Publication Date: Apr 1999
Journal: European Journal of Operational Research
Authors: ,
Keywords: simulation: applications
Abstract:

We build a framework for modelling the deviation of observed option prices from the Black & Scholes prices. We use a flexible model for a density, a two sided switching Weibull, to capture the implied volatility. The model can be used to generate prices, it can take into account no-arbitrage bounds for option prices and is capable of generating such stylised facts as the smile effect. We apply this methodology to LIFFE options on German government bond futures.

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