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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Pricing Autocallables in a Heston-like Local-Stochastic Volatility Model |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Date | 2021 |
| Abstract Text | This thesis investigates the pricing of single-asset autocallable barrier reverse convertibles in the Heston local-stochastic volatility (LSV) model. Autocallable structured notes are the most traded equity-linked exotic derivatives. However, their complexity is responsible for recent hedging-related losses at investment banks. The autocallable pay-off embeds an early-redemption feature generating strong path- and model-dependency. In this regard, the local volatility (LV) model is overly simplified for pricing and risk management. Given its ability to match the implied volatility smile and reproduce its realistic dynamics, the LSV model is, in contrast, better suited for exotic derivatives such as autocallables. We use quasi-Monte Carlo methods to study the pricing results of the Heston LSV model and compare it with the LV model. In particular, we establish the sensitivity of the valuation differences of autocallables between the two models with respect to payoff features, model parameters, underlying characteristics, and volatility regimes. We find that the improved spot-volatility dynamics captured by the Heston LSV model typically result in higher prices, thus demonstrating the dependence of autocallables on the forward-skew. Moreover, we show that the parameters of the stochastic component of LSV models allow controlling for the autocallables price while leaving the fit to European options unaffected. |
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