Doctoral thesis

Three essays in option pricing


121 p

Thèse de doctorat: Università della Svizzera italiana, 2009 (jury note: summa cum laude)

English The present work explores the option pricing world under three different perspectives: theoretical models, numerical methods and real options. In the first chapter we develop a novel option pricing model. We define a stochastic volatility process for the underlying evolution using the realized volatility as a proxy of the true but unobservable volatility of the underlying. That reduces enormously the estimation effort compared to standard filtering procedures and, thanks to the informational content of high frequency data, we are also able to produce pricing errors smaller than that of typical GARCH models. The second chapter deals with the numerical approximation of Barrier option prices using binomial-trinomial trees. We modify the lattice transition probability taking into account the barrier crossing between two successive nodes. In a set of examples, we show how this procedure increases considerably the speed of convergence of the tree approximation towards the true analytical price (when available). The same procedure can be also applied to the pricing of Bermuda-style options. Finally, the last chapter shows how option pricing principles can be used for capital budgeting decisions. We develop a common and unified dynamic framework for the valuation of modular designs/projects. The approach is accurate, general and flexible.
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