Pricing foreign equity option with stochastic volatility

Qi Sun and Weidong Xu

Physica A: Statistical Mechanics and its Applications, 2015, vol. 437, issue C, 89-100

Abstract: In this paper we propose a general foreign equity option pricing framework that unifies the vast foreign equity option pricing literature and incorporates the stochastic volatility into foreign equity option pricing. Under our framework, the time-changed Lévy processes are used to model the underlying assets price of foreign equity option and the closed form pricing formula is obtained through the use of characteristic function methodology. Numerical tests indicate that stochastic volatility has a dramatic effect on the foreign equity option prices.

Keywords: Exchange rate; Foreign equity option; Fourier transform; Time-changed Lévy process (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:437:y:2015:i:c:p:89-100

DOI: 10.1016/j.physa.2015.05.059

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