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Price call and put options using Constant Elasticy of Variance model

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02 Jan 2013 (Updated )

An alternative to using Black and Scholes model is using Constant Elasticity of Variance model.

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An alternative to using Black and Scholes model is using Constant Elasticity of Variance model.
This is a diffusion model where the risk neutral process for a stock is
dS=(r-s)*S*dt - sigma*S^alpha*dZ

Input:
S- underlying price.
K- strike price
r- risk free rate
T- time to maturity
sigma- std of the underlying asset
q- yield to maturity of the underlying asset
alpha- Elasticity of variance

Outputs:
call- the price of call option
put- the price of put option

Example:

[call,put]=constantElasticity(50,50,0.04,1,0.3,0,1)

Reference:

[1] Options,Futures and other Derivatives, seventh edition by John Hull

Required Products Financial Toolbox
Statistics Toolbox
MATLAB
MATLAB release MATLAB 8.0 (R2012b)
Other requirements should work well with any recent release of MATLAB and Financial toolbox
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Updates
24 Jan 2013

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