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In this chapter, we assume that the volatility of option price model is stochastic instead of deterministic. We apply such assumption to the nonclosed-form solution developed by Scott (Journal of Finance and Quantitative Analysis 22(4):419–438, 1987) and the closed-form solution of Heston (The Review of Financial Studies 6(2):327–343, 1993). In both cases, we consider a model in which the variance...
In this chapter we introduce the application of the characteristic function in financial research. We consider the technique of the characteristic function useful for many option pricing models. Two option pricing models are derived in details based on the characteristic functions.
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