Title: Closed-form approximations in derivatives pricing: The Kristensen-Mele approach,
Abstract: Kristensen and Mele (2011) developed a new approach to obtain closed-form
approximations to continuous-time derivatives pricing models. The approach uses
a power series expansion of the pricing bias between an intractable model and
some known auxiliary model. Since the resulting approximation formula has
closed-form it is straightforward to obtain approximations of greeks. In this
thesis I will introduce Kristensen and Mele's methods and apply it to a variety
of stochastic volatility models of European style options as well as a model
for commodity futures. The focus of this thesis is the effect of different
model choices and different model parameter values on the numerical stability
of Kristensen and Mele's approximation.