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The Combinational Mutation Strategy of Differential Evolution Algorithm for Pricing Vanilla Options and Its Implementation on Data during Covid-19 Pandemic

Author

Listed:
  • Werry Febrianti
  • Kuntjoro Adji Sidarto
  • Novriana Sumarti

Abstract

Investors always want to know about the profit and the risk that they will be get before buying some assets. Our main focus is getting the profit and the probability of getting that profit using the differential evolution algorithm for vanilla option pricing on data before and during COVID-19 pandemic. Therefore, we model the pricing of an option using a bi-objective optimization problem using data before and during COVID-19 pandemic for one year expiration date. We change this problem into an optimization problem using adaptive weighted sum method. We use metaheuristics algorithm like Differential Evolution (DE) algorithm to solve this bi-objective optimization problems. In this paper, we also use modification of Differential Evolution for getting Pareto optimal solutions on vanilla option pricing for all contract. The algorithm is called Combinational Mutation Strategy of Differential Evolution (CmDE) algorithm. The results of our algorithm are satisfactory close to the real option price in the market data. Besides that, we also compare our result with the Black-Scholes results for validation. The results show that our results can approximate the real market options more accurate than Black-Scholes results. Hence, our bi-objective optimization using Combinational Mutation Strategy of Differential Evolution algorithm can be used to approximate the market real vanilla option pricing before and during COVID-19 pandemic.

Suggested Citation

  • Werry Febrianti & Kuntjoro Adji Sidarto & Novriana Sumarti, 2023. "The Combinational Mutation Strategy of Differential Evolution Algorithm for Pricing Vanilla Options and Its Implementation on Data during Covid-19 Pandemic," Papers 2301.09261, arXiv.org.
    • Handle: RePEc:arx:papers:2301.09261
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    References listed on IDEAS

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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    3. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    4. Brennan, Michael J. & Schwartz, Eduardo S., 1978. "Finite Difference Methods and Jump Processes Arising in the Pricing of Contingent Claims: A Synthesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(3), pages 461-474, September.
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