Trading Options Risk-Free with HESTON MODEL in Python
In this video we'll see how to use the Breeden-Litzenberger formula to derive the risk-neutral density function from European call options with stochastic volatility under the Heston model.
From Wikipedia:
In finance, the Heston model, named after Steven L. Heston, is a mathematical model that describes the evolution of the volatility of an underlying asset. It is a stochastic volatility model: such a model assumes that the volatility of the asset is not constant, nor even deterministic, but follows a random process.
Heston model parameters:
S = spot price
K = strike price
T = maturity
r = risk-free rate
d = dividend yield
v0 = initial volatility
kappa = mean reversion rate
theta = mean reversion level
sigma = vol-of-vol
rho = correlation between spot price and volatility
Chapters:
00:00 - Introduction
00:42 - Heston model's parameters
02:18 - Heston model's pdf
08:42 - Testing functions
10:12 - Plot of density function