A locally-built, LLM-digested index of recent arXiv papers in quant finance, geometry/topology, and statistical ML — keyword search served straight from SQLite on this machine.
Optimal hedging strategies for exotic options using vanilla options.
This paper uses basket option formulas to price vanilla options with discrete dividends.
New FX option interpolations impact implied volatilities.
Algorithm improves vanilla option pricing accuracy during and before COVID-19.
We study option pricing and hedging with uncertainty about a Black-Scholes reference model which is dynamically recalibrated to the market price of a liquidly traded vanilla option. For dynamic trading in the underlying asset and this vanilla option, delta-vega hedging is asymptotically optimal in the limit for small u…
The Bass model is calibrated to vanilla options using a fixed-point equation.
New method uses neural networks for better financial hedging.
Study optimizes option pricing with robust strategies, ensuring consistency with vanilla option prices.
It is well known that any sufficiently regular one-dimensional payoff function has an explicit static hedge by bonds, forward contracts and lots of vanilla options. We show that the natural extension of the corresponding representation leads to a static hedge based on the same instruments along with traffic light optio…
We apply supervised deep neural networks (DNNs) for pricing and calibration of both vanilla and exotic options under both diffusion and pure jump processes with and without stochastic volatility. We train our neural network models under different number of layers, neurons per layer, and various different activation fun…
Model-free approach to hedge path-dependent options using min-max optimization.
This paper examines Bachelier implied volatility at extreme strikes.
Quantization algorithms have been successfully adopted to option pricing in finance thanks to the high convergence rate of the numerical approximation. In particular, very recently, recursive marginal quantization has been proven to be a flexible and versatile tool when applied to stochastic volatility processes. In th…
The paper finds optimal strategies for hedging in incomplete markets using derivatives.
We show that the frequent claim that the implied tree prices exotic options consistently with the market is untrue if the local volatilities are subject to change and the market is arbitrage-free. In the process, we analyse -- in the most general context -- the impact of stochastic variables on the P&L of a hedged port…
Study utility indifference pricing in a Bachelier model with small linear price impact.
The study finds flaws in methods used to estimate foreign exchange option prices.
Mathematical models for financial asset prices which include, for example, stochastic volatility or jumps are incomplete in that derivative securities are generally not replicable by trading in the underlying. In earlier work (2004) the first author provided a geometric condition under which trading in the underlying a…
In this work we present an analytical model, based on the path-integral formalism of Statistical Mechanics, for pricing options using first-passage time problems involving both fixed and deterministically moving absorbing barriers under possible non-gaussian distributions of the underlying object. We adapt to our probl…
Develops a deep learning method for enforcing no-arbitrage in local volatility surfaces.
Develops a nonparametric model for arbitrage-free pricing of illiquid derivatives.
A hybrid framework prices options using neural networks and VAE latent space.
New formulas for pricing Asian and basket options using stochastic expansion.
CDS options allow investors to express a view on spread volatility and obtain a wider range of payoffs than are possible with vanilla CDS. We give a detailed exposition of different types of single-name CDS option, including options with upfront protection payment, recovery options and recovery swaps, and also presents…
Fourier methods fail to accurately approximate option Greeks in realistic market conditions.
The presence of discrete dividends complicates the derivation and form of pricing formulas even for vanilla options. Existing analytic, numerical, and theoretical approximations provide results of varying quality and performance. Here, we compare the analytic approach, developed and effective for European puts and call…
Study optimal liquidation under high risk aversion and small price impact.
In this paper, we give a numerical method for pricing long maturity, path dependent options by using the Markov property for each underlying asset. This enables us to approximate a path dependent option by using some kinds of plain vanillas. We give some examples whose underlying assets behave as some popular Levy proc…
We discuss a semi-analytical method for solving SABR-type equations based on path integrals. In this approach, one set of variables is integrated analytically while the second set is integrated numerically via Monte-Carlo. This method, known in the literature as Conditional Monte-Carlo, leads to compact expressions fun…
We present a novel method for the numerical pricing of American options based on Monte Carlo simulation and the optimization of exercise strategies. Previous solutions to this problem either explicitly or implicitly determine so-called optimal exercise regions, which consist of points in time and space at which a given…
Motivated by the model- independent pricing of derivatives calibrated to the real market, we consider an optimization problem similar to the optimal Skorokhod embedding problem, where the embedded Brownian motion needs only to reproduce a finite number of prices of Vanilla options. We derive in this paper the correspon…
Weighted Monte Carlo prices exotic options calibrating the probabilities of previously generated paths by a regular Monte Carlo to fit a set of option premiums. When only vanilla call and put options and forward prices are considered, the Martingale condition might not be preserved. This paper shows that this is indeed…
Novel method recovers market regime changes from option prices.
Paper presents new expansions for option pricing with cash dividends.
We present a path integral method to derive closed-form solutions for option prices in a stochastic volatility model. The method is explained in detail for the pricing of a plain vanilla option. The flexibility of our approach is demonstrated by extending the realm of closed-form option price formulas to the case where…
Method interpolates option prices and volatilities without arbitrage.
In this paper, we argue that, once the costs of maintaining the hedging portfolio are properly taken into account, semi-static portfolios should more properly be thought of as separate classes of derivatives, with non-trivial, model-dependent payoff structures. We derive new integral representations for payoffs of exot…
In this article, we consider European options of type depending on several underlying assets. We study how such options can be valued in terms of simple vanilla options in non-specified market models. We consider different approaches related to static hedging and derive several pricing f…
New formulas for barrier options in stochastic volatility models with nonzero correlation.
It turns out that in the bivariate Black-Scholes economy Margrabe type options exhibit symmetry properties leading to semi-static hedges of rather general barrier options. Some of the results are extended to variants obtained by means of Brownian subordination. In order to increase the liquidity of the hedging instrume…
Perpetual American options are financial instruments that can be readily exercised and do not mature. In this paper we study in detail the problem of pricing this kind of derivatives, for the most popular flavour, within a framework in which some of the properties |volatility and dividend policy| of the underlying stoc…
We characterize the set of market models when there are a finite number of traded Vanilla and Barrier options with maturity written on the asset . From a probabilistic perspective, our result describes the set of joint distributions for when a finite number of marginal law constraint…
The vast majority of works on option pricing operate on the assumption of risk neutral valuation, and consequently focus on the expected value of option returns, and do not consider risk parameters, such as variance. We show that it is possible to give explicit formulae for the variance of European option returns (vani…
LOV model calibrates European and American options with path-dependent volatility.
A new relaxed framework for pricing illiquid derivatives using bid-ask spreads.
We propose a Fundamental Theorem of Asset Pricing and a Super-Replication Theorem in a model-independent framework. We prove these theorems in the setting of finite, discrete time and a market consisting of a risky asset S as well as options written on this risky asset. As a technical condition, we assume the existence…
Derives new equations for volatility models and option pricing.
Report presents analysis of empirical distribution of future returns of bitcoin (BTC) from BTUSD inverse option prices. Logistic pdf is chosen as underlying distribution to fit option prices. The result is satisfactory and suggests that these prices can be described with just three or even one parameter. Fitted Logisti…