The SABR model is widely used by practitioners in the financial industry, especially in the interest rates derivatives markets. A suitable characteristic of any local and stochastic volatility model is that the model can yield the same prices of the vanilla options that were applied as inputs to the calibration of the model. failure to do so will clearly cause the model not … [Read more...]
Risk Neutral Measure : Stochastic Volatility Models
In mathematical finance, a risk-neutral measure,is a probability measure that results when one assumes that the current value of all financial assets is equal to the expected value of the future payoff of the asset discounted at the risk-free rate. The concept is used in the pricing of derivatives. It is important to note that clearly the probabilities over asset outcomes in … [Read more...]
Heston Model in Stock Trading
Named after Steven Heston, the Heston model is a mathematical model describing the evolution of the volatility of an underlying asset. It is a stochastic volatility model: such a model assumes that the volatility of the asset is not constant, nor even deterministic, but follows a random process. The Heston Model is one of the most widely used stochastic volatility (SV) … [Read more...]
Chen Model in Stock Trading
Chen Model is a mathematical model. The Chen Model deals with the interest rates and their development. The Chen Model is important in the context of finance. It was the first stochastic mean and stochastic volatility model and it was published in 1994 by Lin Chen. The Chen Model could be described as being a certain kind of "one-factor model". It could also be called a … [Read more...]
What are Currency Options?
Currency Option is a contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time. For this right, a premium is paid to the broker, which will vary depending on the number of contracts purchased. Currency options are one of the best ways for corporations or individuals to hedge against … [Read more...]