New model revolutionizes option pricing, capturing market volatility and futures prices.
The article explores how to price options when the asset they are based on shows both mean reversion and stochastic volatility. The researchers developed a model that can value European options by using Fourier transform. This model can capture the term structure of futures prices and the market's implied volatility smile. They also introduced a method to value path-dependent options with this model. Through numerical examples, they showed that the model works well for European, American, and barrier options.