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Pricing European options and risk measurement under exponential Lévy models - a practical guide

Khaled Salhi 1, 2 
1 TOSCA - TO Simulate and CAlibrate stochastic models
CRISAM - Inria Sophia Antipolis - Méditerranée , IECL - Institut Élie Cartan de Lorraine : UMR7502
Abstract : This paper provides a thorough survey of the European option pricing, with new trends in the risk measurement, under exponential Lévy models. We develop all steps of pricing from equivalent martingale measures construction to numerical valuation of the option price under these measures. We then construct an algorithm, based on Rockafellar and Uryasev representation and fast Fourier transform, to compute Risk indicators, like the VaR and the CVaR of derivatives. The results are illustrated with an example of each exponential Lévy class. The main contribution of this paper is to build a comprehensive study from the theoretical point of view to practical numerical illustration and to give a complete characterization of the studied equivalent martingale measures by discussing their similarity and their applicability in practice. Furthermore, this work proposes applications to the Fourier inversion technique in risk measurement.
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Submitted on : Friday, November 18, 2016 - 5:24:26 PM
Last modification on : Saturday, June 25, 2022 - 7:43:58 PM
Long-term archiving on: : Tuesday, March 21, 2017 - 5:38:36 AM


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Khaled Salhi. Pricing European options and risk measurement under exponential Lévy models - a practical guide. International Journal of Financial Engineering, World Scientific, 2017, 2 (2-3), 1750016 (36 p.). ⟨10.1142/S2424786317500165⟩. ⟨hal-01322698v2⟩



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