Wu Hengyu1£¬Chen Jinxian2
(1.School of Management,Zhongshan University,Guangzhou 510275,China;2.School of Management,Xi'an Jiaotong University,Xi'an 710049,China)
Abstract:In order to analyze the effects of stochastic on the option prices,a new technique based on partial differential equation and characteristic functions was used to establish the closed-form pricing formula of European option model.The model allows arbitrary correlation between volatility and spot-asset returns,and that the price of European option is independent of the drift of the asset price is proved£® Furthermore,in the case that the stochastic interest rates are allowed,the pricing formulas of bond options and currency options can be further given by the model.The conclusion shows that stochastic volatility plays an important role in option pricing£®
Keywords:option valuation;stochastic volatility;riskª²neutral probability