New answers tagged

2

Let us start with the classical Heston model with underlying price $S_t$ and variance $v_t$, \begin{align} \frac{dS}{S}&=\mu dt+\sqrt{v_t}dW_1\\ dv_t&=\kappa(\theta-v_t)dt+\sigma\sqrt{v_t}dW_2 \end{align} and $E(dW_1dW_2)=\rho dt$ From here on, if you want to introduce a mean reverting price level, I might suggest the following adjustment of your ...


1

Let's denote the option you need to hedge by $C_1$, which I am assuming you have sold (if you bought it then just turn the signs around). Under Heston you will need to hedge both its delta and its vega. You can use the underlying $S$ to hedge the delta, but not to hedge vega. The most straightforward way to hedge the vega of $C_1$ is to buy another option in ...


Top 50 recent answers are included