Pricing floating strike lookback put option under heston stochastic volatility

Abstract

The pricing problems of the exotic options in the finance do not have the analytic solutions under stochastic volatility and so it is difficult to calculate the option prices or at least it requires much of time to compute them. This study provides the required theoretical framework to practitioners for the option price estimation. This paper focuses on pricing for floating strike lookback put option and testing option pricing formulas for the Heston stochastic volatility model, which defines the asset volatility as the stochastic process. Our pricing method is depending on the PDE approach on Heston stochastic volatility model and homotopy analysis method. Heston model has received the most attention then it can give a acceptable explanation of the underlying asset dynamics. The resulting formula is well connected to a Black–Scholes price that is the first term of the series expansion, which makes computing the option prices fairly efficient.