Option Pricing for Continuous-Time Log-Normal Mixtures

University essay from Göteborgs universitet/Institutionen för matematiska vetenskaper

Abstract: In this thesis we study the log-normal mixture option pricing model proposedby Brigo and Mercurio [1]. This model is of particular interest since it isan analytically tractable generalization of the Black-Scholes option pricingmodel, but essentially of the same degree of complexity when it comes tocomputing option prices and hedging.Therefore, if the Brigo-Mercurio model proved to be better in terms ofhedging it would be preferable to the Black-Scholes model from a marketpractitioner's point of view.In the latter part of this thesis we will investigate various methods ofhedging and present the results.

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