Author: You Wang
Degree: M.S. in Financial Engineering
Year: 2021
Advisory Committee: Dr. Ionut Florescu, Dr. Zhenyu Cui
Abstract: We propose an approximation method to value volatility options. This method is based on choosing models with closed form solution as an auxiliary model, and derive a mis-pricing formula between the true price and the auxiliary one, then apply Ito-Taylor expansions on the mis-pricing formula to create increasingly improved refinements. We propose an approach to evaluate volatility options under mean-reverting models, in which auxiliary model selection and expansion methods are explained. Method in this paper is applied to mean-reverting Constant elasticity of variance (CEV) model and double CEV models. Numerical results show that the proposed method is accurate and efficient.