A Bull spread is an option strategy in which maximum profit is attained if the underlying security rises in price. Either calls or puts can be used. The lower strike price is purchased and the higher strike price is sold. The options have the same expiration date. You make a lot of money if the stock rises. You lose it all if it doesn't. It's one of those higher risk … [Read more...]
Vanilla Option Style
The Vanilla option style is a category of options which includes only those with the most standard components. A plain vanilla option has an expiration date and straightforward strike price. American-style options and European-style options are both categorized as plain vanilla options. opposite of exotic option. The vanilla option is the most traded and most common option. … [Read more...]
Heath-Jarrow-Morton Framework
The Heath-Jarrow-Morton framework ("HJM") is a general framework to model the evolution of interest rate curve - instantaneous forward rate curve in particular (as opposed to simple forward rates) The key to these techniques is the recognition that the drifts of the no-arbitrage evolution of certain variables can be expressed as functions of their volatilities and the … [Read more...]
Heston model: The Overview
The Heston model is a mathematical model describing the evolution of the volatility of an underlying asset . It is a stochastic volatility model: such a model assumes that the volatility of the asset is not constant, nor even deterministic, but follows a random process. n the Heston model, we still have one asset (volatility is not considered to be directly observable or … [Read more...]
Variance Gamma Model: Overview
The variance-gamma distribution is a continuous probability distribution that is defined as the normal variance-mean mixture where the mixing density is the gamma distribution. The most widely used option pricing model is the Black-Scholes model. We motivate an alternative option pricing model called the Variance Gamma (VG) model and demonstrate its implementation in the … [Read more...]