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Heston Option Pricer

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Heston Option Pricer

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Compute European call option price using the Heston model and a conditional Monte-Carlo method

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Compute European call option price using the Heston model and a conditional Monte-Carlo method

      [call_prices, std_errs] = Heston(S0, r, V0, eta, theta, kappa, strike, T, M, N)

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INPUTS:

  S0 - Current price of the underlying asset.
  r - Annualized continuously compounded risk-free rate of return over the life of the option, expressed as a positive decimal number.

       Heston Parameters:
  V0 - Current variance of the underlying asset
  eta - volatility of volatility
  theta - long-term mean
  kappa - rate of mean-reversion

  strike - Vector of strike prices of the option
  T - Time to expiration of the option, expressed in years.
  N - Number of time steps per path
  M - Number of paths (Monte-Carlo simulations)

*******************************************************************************
  OUTPUTS:

  call_prices - Prices (i.e., value) of a vector of European call options.

  std_err - Standard deviation of the error due to the Monte-Carlo simulation:
                    (std_err = std(sample)/sqrt(length(sample)))
                 
*******************************************************************************
  Example:

    S0 = 100; r = 0.02;
    V0 = 0.04; eta = 0.7; theta = 0.06; kappa = 1.5;
    strike = 85:5:115; T = 0.25
    M = 2000; % Number of paths.
    N = 250; % Number of time steps per path

      [call_prices, std_errs] = Heston(S0, r, V0, eta, theta, kappa, strike, T, M, N)

call_prices =
15.9804 11.4069 7.2125 3.9295 2.1213 1.2922 0.8625
   
std_errs =
 0.0198 0.0263 0.0329 0.0367 0.0357 0.0315 0.0268

*******************************************************************************

I thank Roger Lee for his MSFM course at the University of Chicago

Required Products Financial Toolbox
MATLAB release MATLAB 7.5 (R2007b)
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Comments and Ratings (1)
08 May 2010 Daniel

Hi Rodolph,
Quick question, where does rho fit in, in all of this?

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