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I was wondering if anyone has come across a more straightforward derivation of the semi-closed form solution for the price of a european call under the Heston model than the one proposed by Heston (1993) ?

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  • $\begingroup$ can you add link to this paper? $\endgroup$ – emcor Sep 9 '14 at 13:53
  • $\begingroup$ javaquant.net/papers/Heston-original.pdf $\endgroup$ – dimebucker91 Sep 9 '14 at 14:27
  • $\begingroup$ You mean the maths is too hard? There're lots of books that covers the same topic. $\endgroup$ – SmallChess Sep 10 '14 at 1:29
  • $\begingroup$ I was just hoping there might be an easier way of explaining it, could you list some of those books? $\endgroup$ – dimebucker91 Sep 12 '14 at 2:08
  • $\begingroup$ There are two steps here: (1) derivation of the c.f. for the log-price, and (2) inversion of the c.f. to recover the option price. Which step is troubling you? $\endgroup$ – Kiwiakos Dec 31 '14 at 1:00
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I cannot guarantee that it is error-free, but this paper (appendix A) has a relatively straightforward derivation of the Heston price for a european call.

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I try to give what I at any rate think is a clear explanation of the Fourier transform approach to option pricing for various models including Heston in More Mathematical Finance.

You could also try Lewis's book Option Valuation Under Stochastic Volatility.

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  • $\begingroup$ I think there is a word missing somewhere in your answer... $\endgroup$ – SRKX Oct 30 '14 at 9:26
  • $\begingroup$ Mark refer to section 17.9 in his book. $\endgroup$ – SmallChess Oct 30 '14 at 14:50

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