The Evaluation of Pricing Option with Stochastic Alpha Beta Rho Model

Abstract

This study is the evaluation of European call options under the Stochastic Alpha Beta Rho Model                    (SABR) stochastic volatility model using S5019C2106A Derivative Warrant data. By using the parameters that have been calibrated according to the actual market to calculate the implied volatility according to the SABR model. Then the implied volatility is used for calculating prices of call option.

       The study found that the implied volatility under SABR model, the method 2 of parameter calibration which is to calibrate the Rho and Nu values, using the Implying Alpha from At-the-Money Volatility to obtain an estimate of the price of S5019C2106A is close to  reality in compare with to Method 1 which is directly calibrate Alpha, Rho and Nu and the method of using the constrained volatility values of the Black-Scholes model. By comparing the accuracy of this S5019C2106A price estimation is obtained from the RMSE (Root Mean Square Error).