Research On Option Pricing Based On Volatility Forecast

With China’s firststock option being put on the agenda, theoptions marketcomes under spotlight again. The option pricing of emerging market needs to be studied as soon as possible. In the option pricing model which is under the full market assumption, the volatility is constant. However, in reality, the return rate of underlying asset is heteroscedastic, and simply using the historical volatility will affect the accuracy of option pricing. Predicting future market volatility through modelling and applying the estimated volatility, which takes predictive factors into account, into option pricing will be more accurate.This thesis has firstly summarised the main methods and models of option pricing, which include Black-Scholes pricing model, binomial model, finite difference model and Monte-Carlo simulation method. Then binomial model has been explained in detail, and the algorithm of the binomial model has been provided. After that, the European call and put options of hongkong hang seng index have been priced by using binomial model. Questions and solutions have been raised according to the comparison result between the modelling price and real price. Finally, since the volatility in the option pricing model is heteroscedastic, further research on the volatility has been performed. We have modelled and fitted the hang seng index volatility with ARMA(1,1)-GARCH(1,1) model. With this model, the heteroscedasticity has been effectively reflected and the future volatility has been predicted.