International Journal of Financial Markets and Derivatives http://www.inderscience.com/browse/index.php?journalID=307&year=2011&vol=2&issue=3 Inderscience Publishers Ltd en-uk International Journal of Financial Markets and Derivatives 1756-7130 1756-7149 © 2011 Inderscience Publishers Ltd editor@inderscience.com https://www.inderscience.com/images/files/coverImgs/ijfmd_scoverijfmd.jpg http://www.inderscience.com/browse/index.php?journalID=307&year=2011&vol=2&issue=3 http://www.inderscience.com/link.php?id=42598 The literature on volatility modelling and option pricing is a large and diverse area due to its importance and applications. This paper provides a review of the most significant volatility models and option pricing methods, beginning with constant volatility models up to stochastic volatility. We also survey less commonly known models e.g., hybrid models. We explain various volatility types (e.g., realised and implied volatility) and discuss the empirical properties. A review of volatility and option pricing
Sovan Mitra
International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 149 - 179
The literature on volatility modelling and option pricing is a large and diverse area due to its importance and applications. This paper provides a review of the most significant volatility models and option pricing methods, beginning with constant volatility models up to stochastic volatility. We also survey less commonly known models e.g., hybrid models. We explain various volatility types (e.g., realised and implied volatility) and discuss the empirical properties.

]]> 10.1504/IJFMD.2011.042598 International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 149 - 179 Sovan Mitra Department of Mathematics, Brunel University, Kingston Lane, Uxbridge, Middlesex UK, UB8 3PH, UK option pricing volatility models risk neutral valuation empirical volatility modelling. 2011-09-18T23:20:50-05:00 2 3 149 179 2011-09-18T23:20:50-05:00 http://www.inderscience.com/link.php?id=42599 The pricing of a series of products that combine insurance with investments, known as variable annuities, is considered. Given that there is a single premium instalment, then the death benefit at the time of death is equal to the maximum between the fund value and the sum assured. We have discussed in the past the problem in the case that there is a single premium instalment and the cost of insurance is collected at the beginning. We now move to examine the case that management fees need to be paid periodically via the cancellation of units and study the calculation of the charge that needs to be made by the insurer. We do not use standard actuarial techniques, but rather realise that the risk borne by the insurer resembles to the payoff of an option. We attempt to follow option valuation techniques in discrete time to find the insurance premium. On the pricing of single premium variable annuities with periodic fees and periodic cost of insurance using option pricing techniques
Thomas Poufinas
International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 180 - 194
The pricing of a series of products that combine insurance with investments, known as variable annuities, is considered. Given that there is a single premium instalment, then the death benefit at the time of death is equal to the maximum between the fund value and the sum assured. We have discussed in the past the problem in the case that there is a single premium instalment and the cost of insurance is collected at the beginning. We now move to examine the case that management fees need to be paid periodically via the cancellation of units and study the calculation of the charge that needs to be made by the insurer. We do not use standard actuarial techniques, but rather realise that the risk borne by the insurer resembles to the payoff of an option. We attempt to follow option valuation techniques in discrete time to find the insurance premium.

]]> 10.1504/IJFMD.2011.042599 International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 180 - 194 Thomas Poufinas Department of Statistics and Actuarial Financial Mathematics, University of the Aegean, Karlovassi 83200, Samos, Greece single premium variable annuities option pricing binomial tree probability of death insurance costs management fees periodic fees option valuation insurance premiums. 2011-09-18T23:20:50-05:00 2 3 180 194 2011-09-18T23:20:50-05:00 http://www.inderscience.com/link.php?id=42600 In this paper, we develop valuation models for market-indexed certificate of deposits (market-indexed CD) based on option pricing model. We show that the payoff of an uncapped market-indexed CD can be duplicated by the combination of a zero coupon bond and a call option on the index. Furthermore, we find that the profit of issuing a non-callable market-indexed CD is negative and it is equivalent to the value of a put option on the underlying index with an exercise price equal to the initial index value. Based on the findings in the paper, we conclude that in order to make a profit, a market-indexed CD must have at least one of the following features: a call provision, a guaranteed payoff lower than par value, a cap on the return, or a participation ratio less than 100%. An economic analysis of bank-issued market-indexed certificate of deposit an option pricing approach
Rodrigo Hernández; Jorge Brusa; Daniel Pu Liu
International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 195 - 208
In this paper, we develop valuation models for market-indexed certificate of deposits (market-indexed CD) based on option pricing model. We show that the payoff of an uncapped market-indexed CD can be duplicated by the combination of a zero coupon bond and a call option on the index. Furthermore, we find that the profit of issuing a non-callable market-indexed CD is negative and it is equivalent to the value of a put option on the underlying index with an exercise price equal to the initial index value. Based on the findings in the paper, we conclude that in order to make a profit, a market-indexed CD must have at least one of the following features: a call provision, a guaranteed payoff lower than par value, a cap on the return, or a participation ratio less than 100%.

]]> 10.1504/IJFMD.2011.042600 International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 195 - 208 Rodrigo Hernández; Jorge Brusa; Daniel Pu Liu College of Business and Economics, Radford University, Radford, VA 24142, USA. ' Sanchez School of Business, Texas A&M International University, Laredo, Texas, 78041, USA. ' Sam M. Walton College of Business, University of Arkansas, Fayetteville, AR 72701, USA market indexed certificates of deposit MICD structured products option pricing financial innovation valuation modelling zero coupon bonds call options. 2011-09-18T23:20:50-05:00 2 3 195 208 2011-09-18T23:20:50-05:00 http://www.inderscience.com/link.php?id=42601 A new option pricing formula is presented that unifies several results of the existing literature on exotic option pricing under Lèvy processes and generates new valuation formulas within the Lévy framework. To demonstrate the flexibility of the method a few examples are given and the known Gaussian formulas are obtained as special cases of ours. A general method for pricing European exotic options under Lévy processes
Rossella Agliardi
International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 209 - 222
A new option pricing formula is presented that unifies several results of the existing literature on exotic option pricing under Lèvy processes and generates new valuation formulas within the Lévy framework. To demonstrate the flexibility of the method a few examples are given and the known Gaussian formulas are obtained as special cases of ours.

]]> 10.1504/IJFMD.2011.042601 International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 209 - 222 Rossella Agliardi Department Matemates, University of Bologna, via le Filopanti n.5 Bologna 40100, Italy; Faculty of Economics in Rimini, via Angherà n.22 Rimini 47900, Italy Levy processes option pricing European exotic options Gaussian formulas. 2011-09-18T23:20:50-05:00 2 3 209 222 2011-09-18T23:20:50-05:00 http://www.inderscience.com/link.php?id=42602 Volatility has a significant role to play in the determination of risk and in the valuation of options and other financial derivatives. The well-known Black-Scholes model for the financial derivatives deals with constant volatility. This paper presents a new model based on shot noise behaviour, in which the volatility jump occurs in random instant of times. The closed form solution is derived for the proposed model. Further, numerical results are illustrated to validate the above observations. A non-Markov model for volatility jumps
V. Arunachalam; L. Blanco; S. Dharmaraja
International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 223 - 235
Volatility has a significant role to play in the determination of risk and in the valuation of options and other financial derivatives. The well-known Black-Scholes model for the financial derivatives deals with constant volatility. This paper presents a new model based on shot noise behaviour, in which the volatility jump occurs in random instant of times. The closed form solution is derived for the proposed model. Further, numerical results are illustrated to validate the above observations.

]]> 10.1504/IJFMD.2011.042602 International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 223 - 235 V. Arunachalam; L. Blanco; S. Dharmaraja Department of Mathematics, University of Los Andes, AA 4976, Bogotá, Colombia. ' Department of Statistics, National University of Colombia, Carrera 30, No. 45-03, Bogotá, Colombia. ' Department of Mathematics, Indian Institute of Technology, Delhi Hauz Khas, New Delhi 110016, India option pricing volatility jumps shot noise non-Markov models financial derivatives. 2011-09-18T23:20:50-05:00 2 3 223 235 2011-09-18T23:20:50-05:00 http://www.inderscience.com/link.php?id=42603 We discuss the accurate numerical solution of Black-Scholes differential equations. We check that the stochastic part of the equation could convert small round-off or truncation errors in big errors. However, the numerical method used are low order even in the non-stochastic case due to the complexity of their development. So if we cannot increase the order the numerical method should mimic the differential equation. Finally, we found that the numerical methods of the type 'exponential fitting' are the better choice when we are integrating ordinary Black-Scholes type equations. Accurate numerical solution of Black-Scholes option pricing equations
Raquel García-Rubio
International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 236 - 243
We discuss the accurate numerical solution of Black-Scholes differential equations. We check that the stochastic part of the equation could convert small round-off or truncation errors in big errors. However, the numerical method used are low order even in the non-stochastic case due to the complexity of their development. So if we cannot increase the order the numerical method should mimic the differential equation. Finally, we found that the numerical methods of the type 'exponential fitting' are the better choice when we are integrating ordinary Black-Scholes type equations.

]]> 10.1504/IJFMD.2011.042603 International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 236 - 243 Raquel García-Rubio Departamento de Administración y Economía de la Empresa, Universidad de Salamanca, E37008 Salamanca, Spain Black Scholes equations Monte Carlo simulation option pricing exponential fitting. 2011-09-18T23:20:50-05:00 2 3 236 243 2011-09-18T23:20:50-05:00 http://www.inderscience.com/link.php?id=42604 Previous research assumes that 1) the futures price is a linear function of the market (spot) price and basis risk; 2) the spot price and basis risk are statistically independent. Using a general form of basis risk, we provide empirical comparative statics results. Moreover, we relax the statistical independence assumption. Our monthly data series covers the period March 2000 to 2010, and includes the Henry Hub spot price, futures price and the quantity of natural gas and the hedged quantity. The results show that 1) an increase in the price riskiness increases the optimal hedge; 2) a higher basis risk implies a riskier hedging; 3) a higher correlation between the prices implies a riskier hedging. Hedging with a generalised basis risk: empirical results
Moawia Alghalith; Ricardo Lalloo; Martin Franklin; Christos Floros
International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 244 - 248
Previous research assumes that 1) the futures price is a linear function of the market (spot) price and basis risk; 2) the spot price and basis risk are statistically independent. Using a general form of basis risk, we provide empirical comparative statics results. Moreover, we relax the statistical independence assumption. Our monthly data series covers the period March 2000 to 2010, and includes the Henry Hub spot price, futures price and the quantity of natural gas and the hedged quantity. The results show that 1) an increase in the price riskiness increases the optimal hedge; 2) a higher basis risk implies a riskier hedging; 3) a higher correlation between the prices implies a riskier hedging.

]]> 10.1504/IJFMD.2011.042604 International Journal of Financial Markets and Derivatives, Vol. 2, No. 3 (2011) pp. 244 - 248 Moawia Alghalith; Ricardo Lalloo; Martin Franklin; Christos Floros Economics Department, UWI, St. Augustine, Trinidad. ' Economics Department, UWI, St. Augustine, Trinidad. ' Economics Department, UWI, St. Augustine, Trinidad. ' Department of Economics, University of Portsmouth, Richmond Building, Portland Street, Portsmouth, PO1 3DE, UK; Department of Finance and Insurance, TEI of Crete, Crete, 72100, Greece gas futures spot prices basis risk hedging risk natural gas price risk. 2011-09-18T23:20:50-05:00 2 3 244 248 2011-09-18T23:20:50-05:00