First Encounters with Option Pricing and Return Simulation

Authors

Joshua Cape, Rhodes College
Willam Dearden, Lehigh University
William Gamber, Pomona College
Linh Nguyen, Lafayette College

Abstract

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.

Faculty Sponsor

Qin Lu

Recommended Citation

Cape, Joshua; Dearden, Willam; Gamber, William; and Nguyen, Linh (2015) "First Encounters with Option Pricing and Return Simulation," Rose-Hulman Undergraduate Mathematics Journal: Vol. 16: Iss. 1, Article 11.
Available at: https://scholar.rose-hulman.edu/rhumj/vol16/iss1/11