We provide a tractable introduction to option pricing models and examine how the complex analysis concept of branch-cutting influences financial mathematics. The Black-Scholes model is introduced to motivate our discussion of the Heston stochastic volatility model, a model which dominates industry and option pricing literature in financial mathematics. We focus on developing mathematical intuition as a tool for stimulating further undergraduate interest and research in financial mathematics. We provide code in R and Mathematica for applications.

Author Bio

Joshua Cape is a graduate of Rhodes College.

William Dearden is a graduate of Lehigh University.

Qin Lu, Associate Professor of Mathematics, Lafayette College

Lihn Nguyen is working at NERA Economic Consulting. He is a graduate of Lafayette College.