Hi
my two cents about it
>
> I am wondering why the HestonModelHelper does not allow puts be used in
> the calibration -- since Heston pricing engine can price the puts, I felt
> that only change required is allowing Option::Type be specified as a
> parameter in the constructor. Do you agree with my thinking ?
yes.
> if not, is there a reason for not using the puts for calibration ?
The Heston engine can only be used for european options and for these options
(within the ideal model world) a call price can always be translated into a
put price using the call-put parity and the model-independent forward.
Therefore the HestonModelHelper is using the implied volatility as an input
parameter instead of the market price. Whether the helper internally uses
puts or calls during the calibration doesn't change the calibrated Heston
model.
>
> I am asking this question because I am experimenting ways to achieve a
> good calibration, and I'd like to see if I can get a better calibration by
> using puts. Mainly I'm interested in out of the money puts and calls and
> I'm trying out ways to improve my model prices.
>
..entering real world;-). You should use both, calls and puts.
For equity index options (european style options) use your favourite analytic
or finite difference pricing engine to convert prices to implied vols and
start the Heston calibration. As said above it doesn't matter that the
calibration itself is only using calls as long as you provide implieds vols
from calls and puts.
> As an additional piece of info, I'm using the american prices as input,
> but I use the BaroneAdesyWhaley approximation to find the value of the
> correspoinding european which I use in the calibration
A good approximation for american exercise is to use the 1d finite difference
pricing engine to convert the american market prices into implied
volatilities and then calibrate the standard Heston model (I won't use the
BaroneAdesyWhaley approximation).
IMO the exact handling of the american exercise feature is a real problem as
one needs a Heston finite differences engine to price american options with
discrete dividends ...and this pricing method is relatively slow.
On single stocks implied vols for calls and puts can differ a lot due to
- optimal exercise regions for calls and puts are completely different
- discrete dividend payments
- single stock repo curve (lending single stocks to hedge puts might be
expensive).
- ...
regards
Klaus
--
Klaus Spanderen
Ludwig Erhard Str. 12
48734 Reken (Germany)
EMail: klaus@NOSPAMspanderen.de (remove NOSPAM from the address)
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