The Pricing of Options on Assets with Stochastic Volatilities

The Pricing of Options on Assets with Stochastic Volatilities

  • JOHN HULL
  • ALAN WHITE

Article first published online: 30th April 2012 DOI: 10.1111/j.1540-6261.1987.tb02568.x

Abstract


One option‐pricing problem that has hitherto been unsolved is the pricing of a European call on an asset that has a stochastic volatility. This paper examines this problem. The option price is determined in series form for the case in which the stochastic volatility is independent of the stock price. Numerical solutions are also produced for the case in which the volatility is correlated with the stock price. It is found that the Black‐Scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity.

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