Pricing Financial Derivatives by Gram-Charlier Expansions
Posted: 13 May 2013
Date Written: May 12, 2013
In this paper we provide several applications of Gram-Charlier expansions in financial derivative pricing. We first give an exposition on how to calculate swaption prices under a two-factor Cox-Ingersoll-Ross (CIR2) model. Then we apply this method to an extended version of the model (CIR2 ). We also develop a procedure to calculate European call options under Heston’s model of stochastic volatility by the Gram-Charlier expansions.
Keywords: Cumulants, moments, swaption prices, CIR2 Model, CIR Model, Brennan-Schwarz's Model, Heston's Model
JEL Classification: C00, C15, C63, G00, G12
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