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Option Pricing for Continuous-Time Log-Normal Mixtures

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Title: Option Pricing for Continuous-Time Log-Normal Mixtures
Authors: Björnander, Joakim
Issue Date: 8-Jun-2012
Degree: Student essay
Keywords: Option pricing
local volatility
mixture dynamics
mixture of log-normals
Abstract: In this thesis we study the log-normal mixture option pricing model proposed by Brigo and Mercurio [1]. This model is of particular interest since it is an analytically tractable generalization of the Black-Scholes option pricing model, but essentially of the same degree of complexity when it comes to computing option prices and hedging. Therefore, if the Brigo-Mercurio model proved to be better in terms of hedging it would be preferable to the Black-Scholes model from a market practition... more
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