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LSE OPERATIONAL RESEARCH DEPARTMENT: RESEARCH SEMINAR Wednesday May 16, 2001, 5.00pm - 6.00pm Room S221, St Clement's building: see http://www.lse.ac.uk/School/maps/map1.htm and http://www.lse.ac.uk/School/maps/map3.htm "Derivative pricing using constant elasticity of variance processes" Konstantina Armata, Imperial College London It is common practice in finance to model the evolution of financial variables such as stocks, interest rates and currencies as a diffusion process. The determination of which diffusion process performs best for the financial variable in question is a matter of empirical and theoretical investigation. Constant Elasticity of Variance (CEV) processes is a class of diffusion processes that have been supported by both empirical evidence and theoretical arguments as suitable models for the evolution of a wide range of financial variables. In this work we use three different CEV processes to price: a) "Plain Vanilla" options (based on price at a defined time); b) "Asian" options (based on some average price over a defined period). In the first case, the option pricing model derived is referred to as an amended Bachelier model, in honor of Bachelier, who was the first to use a stochastic process to model the dynamics of a financial variable. The amended Bachelier model overcomes two important drawbacks of Bachelier's original model without altering any of its fundamental assumptions. In the second case, we use CEV processes to derive closed form solutions for the prices and hedging parameters of fixed and floating strike Asian options. *( Refreshments after the seminar in the Operational Research Department ) * Dr Peter Sozou Department of Operational Research London School of Economics Houghton Street, London WC2A 2AE tel: 020 7955-6234(direct) / 7955-7653(admin) fax: 020 7955-6885 email: [log in to unmask] --- End Forwarded Message --- Dr. David Hardman Department of Psychology London Guildhall University Calcutta House Old Castle Street London E1 7NT Phone: +44 020 73201256 Fax: +44 020 73201236 E-mail: [log in to unmask] Internet: http://www.lgu.ac.uk/psychology/staff/hardman/home.html For information on the London Judgment and Decision Making Group visit: http://www.lgu.ac.uk/psychology/staff/hardman/ljdm.html For information on joining the 'Decision' jiscmail list, see http://www.jiscmail.ac.uk/lists/decision.html