A type of stochastic volatility model developed by associate finance professor Steven Heston in 1993 for analyzing bond and currency options. The Heston model is a closed-form solution for pricing options that seeks to overcome the shortcomings in the Black-Scholes option pricing model related to ...

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9
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3answers
1k views

Implementing a Fast Fourier Transform for Option Pricing

So, I'm in need of some tips regarding a small project I'm doing. My goal is an implementation of a Fast Fourier Transform algorithm (FFT) which can be applied to the pricing of options. First ...
5
votes
4answers
853 views

How to avoid having negative volatility when applying Heston model?

When applying the Heston model to generate the sample volatility surface, some of the volatility value will be negative. I am just wondering what do practioners normally do with these negative value. ...
4
votes
2answers
414 views

Heston - How important are the initial guess in calibration and if it is very important, what would be a good way to get initial guess?

So I have been trying to implement a simple Heston calibration using crude MC with 10k scenarios and 1000 time steps and the best I could get is 3x of the observed implied volatility. I suspect it ...
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4answers
165 views

Why square root of volatility in Heston model?

Why do we model it as sqrt root of v(t)? Is that because we don't want the volatility to go negative? If this is the case, can we model it as square of v(t)?