Option price decomposition in spot-dependent volatility models and some applications

In this talk, we show a Hull and White price decomposition formula proved by Merino and Vives (2017) for a general local volatility model. We apply the obtained formula to CEV model. We further derive an approximation for the... [ view full abstract ]

In this talk, we show a Hull and White price decomposition formula proved by Merino and Vives (2017) for a general local volatility model. We apply the obtained formula to CEV model. We further derive an approximation for the price and the implied volatility surface. As an application, we use the approximation of the implied volatility surface to estimate model parameters. Numerical comparison is performed for our new method with exact and approximated formulas existing in the literature.