Power option pricing under the unstable conditions (Evidence of power option pricing under fractional Heston model in the Iran gold market)

Elham Dastranj, Hossein Sahebi Fard, Abdolmajid Abdolbaghi and S. Reza Hejazi

Physica A: Statistical Mechanics and its Applications, 2020, vol. 537, issue C

Abstract: Instability and excessive volatilities in the various financial and non-financial markets have increased the importance of risk hedging in investments. So in this paper, the hypothetical options pricing have been done based on fractional Heston model in Iran’s gold market. In fact power option pricing has been driven using fast Fourier transformation (FFT), and maximum likelihood method. The study period has been classified to periods of three months and the profit and loss resulting from this option in each period has been calculated using discount rate based on the consumer price index. Findings indicated in most periods of three months, the model’s determination has been done correctly and the estimated price of power option has prevented the creation of arbitrage opportunity and caused a secure position of investment. But in the two periods related to 2018 due to high volatilities, the power option has created an arbitrage opportunity.

Keywords: Fractional Heston model; Fractional Brownian motion; Fast Fourier transform; Parameter estimation; Power option pricing (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:537:y:2020:i:c:s037843711931533x

DOI: 10.1016/j.physa.2019.122690

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