Browsing by Author "Manzini, Muzi Charles"
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Item Stochastic Volatility Models for Contingent Claim Pricing and Hedging(University of the Western Cape, 2008) Manzini, Muzi Charles; Witbooi, Peter J.; Faculty of ScienceThe present mini-thesis seeks to explore and investigate the mathematical theory and concepts that underpins the valuation of derivative securities, particularly European plainvanilla options. The main argument that we emphasise is that novel models of option pricing, as is suggested by Hull and White (1987) [1] and others, must account for the discrepancy observed on the implied volatility curve. To achieve this we also propose that market volatility be modeled as random or stochastic as opposed to certain standard option pricing models such as Black-Scholes, in which volatility is assumed to be constant.