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Journal of Applied Mathematics
Volume 2011, Article ID 198469, 18 pages
Research Article

Valuing Options in Heston's Stochastic Volatility Model: Another Analytical Approach

Faculty of Economics and Business Administration, Eberhard Karls University of Tübingen, Mohlstrasse 36, 72074 Tübingen, Germany

Received 21 April 2011; Accepted 27 July 2011

Academic Editor: Julián López-Gómez

Copyright © 2011 Robert Frontczak. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


We are concerned with the valuation of European options in the Heston stochastic volatility model with correlation. Based on Mellin transforms, we present new solutions for the price of European options and hedging parameters. In contrast to Fourier-based approaches, where the transformation variable is usually the log-stock price at maturity, our framework focuses on directly transforming the current stock price. Our solution has the nice feature that it requires only a single integration. We make numerical tests to compare our results with Heston's solution based on Fourier inversion and investigate the accuracy of the derived pricing formulae.