## Heston: simulation and calibration

Heston For my assignment project in the Derivatives MSc course I chose to focus on the Heston Model. I did it using Matlab. The Black and Scholes Model has stochastic returns. Heston models prices as also having stochastic volatility. My assignment project addressed the behaviour of an option, both in a “B&S world” and in a “Heston world”, showing differences between the two such as kurtosis and the smile effect. I simulated stock trajectories both with MonteCarlo (it’s two correlated stochastic processes – returns and volatility) and using the analytic formula. With the analytic formula I plotted the volatility surface of such an option. IRead More →