Option Prices under the Heston Stochastic Volatility Model

Question

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) ?

You mean the maths is too hard? There're lots of books that covers the same topic. — SmallChess, Sep 10 '14 at 01:29
I was just hoping there might be an easier way of explaining it, could you list some of those books? — WeakLearner, Sep 12 '14 at 02:08
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? — Kiwiakos, Dec 31 '14 at 01:00

score 2 · Answer 1 · answered Jan 29 '15 at 09:04

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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.

answered Jan 29 '15 at 09:04

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score 1 · Answer 2 · answered Oct 30 '14 at 09:20

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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.

answered Oct 30 '14 at 09:20

Mark Joshi

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I think there is a word missing somewhere in your answer... – SRKX Oct 30 '14 at 09:26
Mark refer to section 17.9 in his book. – SmallChess Oct 30 '14 at 14:50

Option Prices under the Heston Stochastic Volatility Model

2 Answers2