financialengineerlab/local_volatility_options

Local Volatility Option Pricing

Local Volatility Option Pricing

We wish to price an American put or call option, written on some underlying with value S. Usually, it is assumed that S follows a geometric Brownian motion. More generally, one can assume that S follows a process where the volatility is itself dependent on S. Such option pricing methods are known as local volatility models. Here, we have implemented a function in C++ that prices local volatility options efficiently, relying on the well-known binomial trees. Additionally, we provide a Python binding based on sip (https://www.ics.uci.edu/~dock/manuals/sip/sipref.html).

The core of the implementation, the actual option pricing, is found in LVoptions_.cpp. The remaining files just serve to build the Python interface. Build the Python binding with

python setup.py build_ext --inplace

Then, import the function from the file Python_wrapper.py