Author: You Wang
Advisor: Zhenyu Cui
Date: Nov 17, 2021
Department: Financial Engineering
Degree: Master of Science- Financial Engineering
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 ap ply 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 ex plained. 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.