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Option Pricing Models and Volatility Using Excel-VBA

ISBN: 978-0-471-79464-6
441 pages
April 2007
Option Pricing Models and Volatility Using Excel-VBA (0471794643) cover image
Praise for Option Pricing Models & Volatility Using Excel-VBA

"Excel is already a great pedagogical tool for teaching option valuation and risk management. But the VBA routines in this book elevate Excel to an industrial-strength financial engineering toolbox. I have no doubt that it will become hugely successful as a reference for option traders and risk managers."
Peter Christoffersen, Associate Professor of Finance, Desautels Faculty of Management, McGill University

"This book is filled with methodology and techniques on how to implement option pricing and volatility models in VBA. The book takes an in-depth look into how to implement the Heston and Heston and Nandi models and includes an entire chapter on parameter estimation, but this is just the tip of the iceberg. Everyone interested in derivatives should have this book in their personal library."
Espen Gaarder Haug, option trader, philosopher, and author of Derivatives Models on Models

"I am impressed. This is an important book because it is the first book to cover the modern generation of option models, including stochastic volatility and GARCH."
Steven L. Heston, Assistant Professor of Finance, R.H. Smith School of Business, University of Maryland

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Chapter 1 Mathematical Preliminaries.

Complex Numbers.

Finding Roots of Functions.

OLS and WLS.

Nelder-Mead Algorithm.

Maximum Likelihood Estimation.

Cubic Spline Interpolation.

Exercises and Solutions.

Chapter 2 Numerical Integration.

Newton-Coates Formulas.

Implementing Newton-Coates Formulas in VBA.

Gaussian Quadratures.

Exercises and Solutions.

Chapter 3 Tree-Based Methods.

CRR Binomial Tree.

Leisen-Reimer Binomial Tree.

Edgeworth Binomial Tree.

Flexible Binomial Tree.

Trinomial Tree.

Adaptive Mesh Method.

Comparing Trees.

Implied Volatility Trees.

Allowing for Dividends and the Cost of Carry.

Exercises and Solutions.

Chapter 4 The Black-Scholes, Practitioner Black-Scholes, and Gram-Charlier Models.

Black-Scholes Model.

Implied Volatility and the DVF.

Practitioner Black-Scholes Model.

Gram-Charlier Model.

Exercises and Solutions.

Chapter 5 The Heston Stochastic Volatility Model.

Heston (1993) Model.

Increasing Integration Accuracy.

The Fundamental Tranform.

Sensitivity Analysis.

Exercises and Solutions.

Chapter 6 The Heston and Nandi GARCH Model.

Persistent Volatility in Asset Returns.

GARCH Variance Modeling.

Heston and Nandi (2000) Model.

Exercises and Solutions.

Chapter 7 The Greeks.

Black-Scholes Greeks.

Greeks From the Trees.

Greeks From the Gram-Charlier Model.

Greeks From the Heston (1993) Model.

Greeks From the Heston and Nandi (2000) Model.

Greeks by Finite Differences.

Exercises and Solutions.

Chapter 8 Exotic Options.

Single-Barrier Options.

Digital Options.

Asian Options.

Floating-Strike Lookback Options.

Exercises and Solutions.

Chapter 9 Parameter Estimation.

Unconditional Moments.

Maximum Likelihood for GARCH Models.

Estimation by Loss Functions.

Exercises and Solutions.

Chapter 10 Implied Volatility.

Obtaining Implied Volatility.

Explaining Smiles and Smirks

Fitting the Smile with the Heston (1993) Model.

Exercises and Solutions.

Chapter 11 Model-Free Implied Volatility.

Theoretical Foundation.


Interpolation-Extrapolation Method.

Model-Free Implied Forward Volatility.

The VIX Index.

Exercises and Solutions.

Chapter 12 Model-Free Higher Moments.

Theoretical Foundation.


Verifying Implied Moments.

Gram-Charlier Implied Moments.

Exercises and Solutions.

Chapter 13 Volatility Returns.

Straddle Returns.

Delta-Hedged Gains.

Volatility Exposure.

Variance Swaps.

Exercises and Solutions.

Appendix VBA Primer.

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Fabrice Douglas Rouah is a Senior Quantitative Analyst at a large financial firm in Boston. He is coauthor and coeditor of four books on hedge funds and CTAs. This is his third book with John Wiley & Sons.

Gregory Vainberg is a Corporate Risk Specialist at a large consulting firm in Montreal. He is also the creator of the top finance and math VBA Web site, www.vbnumericalmethods.com.

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