s30nbc (Nag_OrderType order, Nag_CallPut option, Integer m, Integer n, const double x[], double s, const double t[], double sigmav, double kappa, double corr, double var0, double eta, double grisk, double r, double q, double p[], double delta[], double gamma[], double vega[], double theta[], double rho[], double vanna[], double charm[], double speed[], double zomma[], double vomma[], NagError *fail)

The function may be called by the names: s30nbc, nag_specfun_opt_heston_greeks or nag_heston_greeks.

3 Description

s30nbc computes the price and sensitivities of a European option using Heston's stochastic volatility model. The return on the asset price,

S

, is

\frac{d S}{S} = (r - q) d t + \sqrt{v_{t}} d W_{t}^{(1)}

and the instantaneous variance,

v_{t}

, is defined by a mean-reverting square root stochastic process,

d v_{t} = κ (η - v_{t}) d t + σ_{v} \sqrt{v_{t}} d W_{t}^{(2)},

where

r

is the risk free annual interest rate;

q

is the annual dividend rate;

v_{t}

is the variance of the asset price;

σ_{v}

is the volatility of the volatility,

\sqrt{v_{t}}

;

κ

is the mean reversion rate;

η

is the long term variance.

d W_{t}^{(i)}

, for

i = 1, 2

, denotes two correlated standard Brownian motions with

ℂov [d W_{t}^{(1)}, d W_{t}^{(2)}] = ρ d t .

The option price is computed by evaluating the integral transform given by Lewis (2000) using the form of the characteristic function discussed by Albrecher et al. (2007), see also Kilin (2006).

P_{call} = S e^{- q T} - X e^{- r T} \frac{1}{π} Re [\int_{0 + i / 2}^{\infty + i / 2} e^{- i k \bar{X}} \frac{\hat{H} (k, v, T)}{k^{2} - i k} d k],

(1)

where

\bar{X} = \ln (S / X) + (r - q) T

and

\hat{H} (k, v, T) = \exp (\frac{2 κ η}{σ_{v}^{2}} [t g - \ln (\frac{1 - h e^{- ξ t}}{1 - h})] + v_{t} g [\frac{1 - e^{- ξ t}}{1 - h e^{- ξ t}}]),

g = \frac{1}{2} (b - ξ), h = \frac{b - ξ}{b + ξ}, t = σ_{v}^{2} T / 2,

ξ = {[b^{2} + 4 \frac{k^{2} - i k}{σ_{v}^{2}}]}^{\frac{1}{2}},

b = \frac{2}{σ_{v}^{2}} [(1 - γ + i k) ρ σ_{v} + \sqrt{κ^{2} - γ (1 - γ) σ_{v}^{2}}]

with

t = σ_{v}^{2} T / 2

. Here

γ

is the risk aversion parameter of the representative agent with

0 \leq γ \leq 1

and

γ (1 - γ) σ_{v}^{2} \leq κ^{2}

. The value

γ = 1

corresponds to

λ = 0

, where

λ

is the market price of risk in Heston (1993) (see Lewis (2000) and Rouah and Vainberg (2007)).

The price of a put option is obtained by put-call parity.

P_{put} = P_{call} + X e^{- r T} - S e^{- q T} .

Writing the expression for the price of a call option as

P_{call} = S e^{- q T} - X e^{- r T} \frac{1}{π} Re [\int_{0 + i / 2}^{\infty + i / 2} I (k, r, S, T, v) d k]

then the sensitivities or Greeks can be obtained in the following manner,

Delta

\frac{\partial P_{call}}{\partial S} = e^{- q T} + \frac{X e^{- r T}}{S} \frac{1}{π} Re [\int_{0 + i / 2}^{\infty + i / 2} (i k) I (k, r, S, T, v) d k],

Vega

\frac{\partial P}{\partial v} = - X e^{- r T} \frac{1}{π} Re [\int_{0 - i / 2}^{0 + i / 2} f_{2} I (k, r, j, S, T, v) d k],  where ​ f_{2} = g [\frac{1 - e^{- ξ t}}{1 - h e^{- ξ t}}],

Rho

\frac{\partial P_{call}}{\partial r} = T X e^{- r T} \frac{1}{π} Re [\int_{0 + i / 2}^{\infty + i / 2} (1 + i k) I (k, r, S, T, v) d k] .

The option price

P_{i j} = P (X = X_{i}, T = T_{j})

is computed for each strike price in a set

X_{i}

i = 1, 2, \dots, m

, and for each expiry time in a set

T_{j}

j = 1, 2, \dots, n

4 References

Albrecher H, Mayer P, Schoutens W and Tistaert J (2007) The little Heston trap Wilmott Magazine January 2007 83–92

Heston S (1993) A closed-form solution for options with stochastic volatility with applications to bond and currency options Review of Financial Studies 6 327–343

Kilin F (2006) Accelerating the calibration of stochastic volatility models MPRA Paper No. 2975 https://mpra.ub.uni-muenchen.de/2975/

Lewis A L (2000) Option valuation under stochastic volatility Finance Press, USA

Rouah F D and Vainberg G (2007) Option Pricing Models and Volatility using Excel-VBA John Wiley and Sons, Inc

5 Arguments

1: $order$ – Nag_OrderType Input

On entry: the order argument specifies the two-dimensional storage scheme being used, i.e., row-major ordering or column-major ordering. C language defined storage is specified by

order = Nag_RowMajor

. See Section 3.1.3 in the Introduction to the NAG Library CL Interface for a more detailed explanation of the use of this argument.

Constraint:

order = Nag_RowMajor

Nag_ColMajor

2: $option$ – Nag_CallPut Input

On entry: determines whether the option is a call or a put.

$option = Nag_Call$: A call; the holder has a right to buy.
$option = Nag_Put$: A put; the holder has a right to sell.

Constraint:

option = Nag_Call

Nag_Put

3: $m$ – Integer Input

On entry: the number of strike prices to be used.

Constraint:

m \geq 1

4: $n$ – Integer Input

On entry: the number of times to expiry to be used.

Constraint:

n \geq 1

5: $x [m]$ – const double Input

On entry:

x [i - 1]

must contain

X_{i}

, the

i

th strike price, for

i = 1, 2, \dots, m

Constraint:

x [i - 1] \geq z ​ and ​ x [i - 1] \leq 1 / z

, where

z = nag_real_safe_small_number

, the safe range parameter, for

i = 1, 2, \dots, m

6: $s$ – double Input

On entry:

S

, the price of the underlying asset.

Constraint:

s \geq z ​ and ​ s \leq 1.0 / z

, where

z = nag_real_safe_small_number

, the safe range parameter.

7: $t [n]$ – const double Input

On entry:

t [i - 1]

must contain

T_{i}

, the

i

th time, in years, to expiry, for

i = 1, 2, \dots, n

Constraint:

t [i - 1] \geq z

, where

z = nag_real_safe_small_number

, the safe range parameter, for

i = 1, 2, \dots, n

8: $sigmav$ – double Input

On entry: the volatility,

σ_{v}

, of the volatility process,

\sqrt{v_{t}}

. Note that a rate of 20% should be entered as

0.2

Constraint:

sigmav > 0.0

9: $kappa$ – double Input

On entry:

κ

, the long term mean reversion rate of the volatility.

Constraint:

kappa > 0.0

10: $corr$ – double Input

On entry: the correlation between the two standard Brownian motions for the asset price and the volatility.

Constraint:

- 1.0 \leq corr \leq 1.0

11: $var0$ – double Input

On entry: the initial value of the variance,

v_{t}

, of the asset price.

Constraint:

var0 \geq 0.0

12: $eta$ – double Input

On entry:

η

, the long term mean of the variance of the asset price.

Constraint:

eta > 0.0

13: $grisk$ – double Input

On entry: the risk aversion parameter,

γ

, of the representative agent.

Constraint:

0.0 \leq grisk \leq 1.0

and

grisk \times (1 - grisk) \times sigmav \times sigmav \leq kappa \times kappa

14: $r$ – double Input

On entry:

r

, the annual risk-free interest rate, continuously compounded. Note that a rate of 5% should be entered as

0.05

Constraint:

r \geq 0.0

15: $q$ – double Input

On entry:

q

, the annual continuous yield rate. Note that a rate of 8% should be entered as

0.08

Constraint:

q \geq 0.0

16: $p [m \times n]$ – double Output

Note: where

P (i, j)

appears in this document, it refers to the array element

$p [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$p [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

P (i, j)

contains

P_{i j}

, the option price evaluated for the strike price

x_{i}

at expiry

t_{j}

for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

17: $delta [m \times n]$ – double Output

Note: the

(i, j)

th element of the matrix is stored in

$delta [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$delta [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit: the

m \times n

array delta contains the sensitivity,

\frac{\partial P}{\partial S}

, of the option price to change in the price of the underlying asset.

18: $gamma [m \times n]$ – double Output

Note: the

(i, j)

th element of the matrix is stored in

$gamma [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$gamma [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit: the

m \times n

array gamma contains the sensitivity,

\frac{\partial^{2} P}{\partial S^{2}}

, of delta to change in the price of the underlying asset.

19: $vega [m \times n]$ – double Output

Note: where

VEGA (i, j)

appears in this document, it refers to the array element

$vega [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$vega [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

VEGA (i, j)

, contains the first-order Greek measuring the sensitivity of the option price

P_{i j}

to change in the volatility of the underlying asset, i.e.,

\frac{\partial P_{i j}}{\partial σ}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

20: $theta [m \times n]$ – double Output

Note: where

THETA (i, j)

appears in this document, it refers to the array element

$theta [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$theta [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

THETA (i, j)

, contains the first-order Greek measuring the sensitivity of the option price

P_{i j}

to change in time, i.e.,

- \frac{\partial P_{i j}}{\partial T}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

, where

b = r - q

21: $rho [m \times n]$ – double Output

Note: where

RHO (i, j)

appears in this document, it refers to the array element

$rho [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$rho [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

RHO (i, j)

, contains the first-order Greek measuring the sensitivity of the option price

P_{i j}

to change in the annual risk-free interest rate, i.e.,

\frac{\partial P_{i j}}{\partial r}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

22: $vanna [m \times n]$ – double Output

Note: where

VANNA (i, j)

appears in this document, it refers to the array element

$vanna [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$vanna [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

VANNA (i, j)

, contains the second-order Greek measuring the sensitivity of the first-order Greek

Δ_{i j}

to change in the volatility of the asset price, i.e.,

\frac{\partial Δ_{i j}}{\partial σ} = \frac{\partial^{2} P_{i j}}{\partial S \partial σ}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

23: $charm [m \times n]$ – double Output

Note: where

CHARM (i, j)

appears in this document, it refers to the array element

$charm [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$charm [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

CHARM (i, j)

, contains the second-order Greek measuring the sensitivity of the first-order Greek

Δ_{i j}

to change in the time, i.e.,

- \frac{\partial Δ_{i j}}{\partial T} = - \frac{\partial^{2} P_{i j}}{\partial S \partial T}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

24: $speed [m \times n]$ – double Output

Note: where

SPEED (i, j)

appears in this document, it refers to the array element

$speed [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$speed [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

SPEED (i, j)

, contains the third-order Greek measuring the sensitivity of the second-order Greek

Γ_{i j}

to change in the price of the underlying asset, i.e.,

\frac{\partial Γ_{i j}}{\partial S} = \frac{\partial^{3} P_{i j}}{\partial S^{3}}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

25: $zomma [m \times n]$ – double Output

Note: where

ZOMMA (i, j)

appears in this document, it refers to the array element

$zomma [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$zomma [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

ZOMMA (i, j)

, contains the third-order Greek measuring the sensitivity of the second-order Greek

Γ_{i j}

to change in the volatility of the underlying asset, i.e.,

\frac{\partial Γ_{i j}}{\partial σ} = \frac{\partial^{3} P_{i j}}{\partial S^{2} \partial σ}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

26: $vomma [m \times n]$ – double Output

Note: where

VOMMA (i, j)

appears in this document, it refers to the array element

$vomma [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$vomma [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

VOMMA (i, j)

, contains the second-order Greek measuring the sensitivity of the option price

P_{i j}

to second-order changes in the volatility of the underlying asset, i.e.,

\frac{\partial^{2} P_{i j}}{\partial σ^{2}}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

27: $fail$ – NagError * Input/Output

The NAG error argument (see Section 7 in the Introduction to the NAG Library CL Interface).

6 Error Indicators and Warnings

NE_ACCURACY: Solution cannot be computed accurately. Check values of input arguments.
NE_ALLOC_FAIL: Dynamic memory allocation failed.
See Section 3.1.2 in the Introduction to the NAG Library CL Interface for further information.
NE_BAD_PARAM: On entry, argument $⟨ value ⟩$ had an illegal value.
NE_CONVERGENCE: Quadrature has not converged to the required accuracy. However, the result should be a reasonable approximation.
NE_INT: On entry, $m = ⟨ value ⟩$ .
Constraint: $m \geq 1$ .

On entry, $n = ⟨ value ⟩$ .
Constraint: $n \geq 1$ .
NE_INTERNAL_ERROR: An internal error has occurred in this function. Check the function call and any array sizes. If the call is correct then please contact NAG for assistance.
See Section 7.5 in the Introduction to the NAG Library CL Interface for further information.
NE_NO_LICENCE: Your licence key may have expired or may not have been installed correctly.
See Section 8 in the Introduction to the NAG Library CL Interface for further information.
NE_REAL: On entry, $corr = ⟨ value ⟩$ .
Constraint: $| corr | \leq 1.0$ .

On entry, $eta = ⟨ value ⟩$ .
Constraint: $eta > 0.0$ .

On entry, $grisk = ⟨ value ⟩$ , $sigmav = ⟨ value ⟩$ and $kappa = ⟨ value ⟩$ .
Constraint: $0.0 \leq grisk \leq 1.0$ and $grisk \times (1.0 - grisk) \times {sigmav}^{2} \leq {kappa}^{2}$ .

On entry, $kappa = ⟨ value ⟩$ .
Constraint: $kappa > 0.0$ .

On entry, $q = ⟨ value ⟩$ .
Constraint: $q \geq 0.0$ .

On entry, $r = ⟨ value ⟩$ .
Constraint: $r \geq 0.0$ .

On entry, $s = ⟨ value ⟩$ .
Constraint: $s \geq ⟨ value ⟩$ and $s \leq ⟨ value ⟩$ .

On entry, $sigmav = ⟨ value ⟩$ .
Constraint: $sigmav > 0.0$ .

On entry, $var0 = ⟨ value ⟩$ .
Constraint: $var0 \geq 0.0$ .
NE_REAL_ARRAY: On entry, $t [⟨ value ⟩] = ⟨ value ⟩$ .
Constraint: $t [i - 1] \geq ⟨ value ⟩$ .

On entry, $x [⟨ value ⟩] = ⟨ value ⟩$ .
Constraint: $x [i - 1] \geq ⟨ value ⟩$ and $x [i - 1] \leq ⟨ value ⟩$ .

7 Accuracy

The accuracy of the output is determined by the accuracy of the numerical quadrature used to evaluate the integral in (1). An adaptive method is used which evaluates the integral to within a tolerance of

\max (10^{- 8}, 10^{- 10} \times | I |)

, where

| I |

is the absolute value of the integral.

8 Parallelism and Performance

Background information to multithreading can be found in the Multithreading documentation.

s30nbc is threaded by NAG for parallel execution in multithreaded implementations of the NAG Library.

Please consult the X06 Chapter Introduction for information on how to control and interrogate the OpenMP environment used within this function. Please also consult the Users' Note for your implementation for any additional implementation-specific information.

9 Further Comments

None.

10 Example

This example computes the price and sensitivities of a European call using Heston's stochastic volatility model. The time to expiry is

1

year, the stock price is

100

and the strike price is

100

. The risk-free interest rate is

2.5 %

per year, the volatility of the variance,

σ_{v}

, is

57.51 %

per year, the mean reversion parameter,

κ

, is

1.5768

, the long term mean of the variance,

η

, is

0.0398

and the correlation between the volatility process and the stock price process,

ρ

, is

- 0.5711

. The risk aversion parameter,

γ

, is

1.0

and the initial value of the variance, var0, is

0.0175

s30nb: FL CL CPP AD PY MB

NAG CL Interfaces30nbc (opt_​heston_​greeks)

▸▿ Contents

1 Purpose

2 Specification

3 Description

4 References

5 Arguments

6 Error Indicators and Warnings

7 Accuracy

8 Parallelism and Performance

9 Further Comments

10 Example

10.1 Program Text

10.2 Program Data

10.3 Program Results

NAG CL Interface
s30nbc (opt_heston_greeks)