Pricing Target Volatility Options Under Multifactor Ornstein-Uhlenbeck Process

In recent years,the target volatility is a new kind of products.It’s different from pure volatility derivatives,the yield of it depends on the underlying assets and the realized variance.In equity options markets,the slope of the curve to a large extent depends on the level of volatility.Given the volatility,volatility of a single factor of Heston model can generate steep or flat curve,but cannot be given a steep and gentle curve of the market.Hence,this model has a strong restrictive.The payoff of target volatility options is a function of about the underlying asset and the reality volatility,and it is necessary to consider the correlation between the volatility of assets and profits.In this paper,we study the target volatility in option pricing,consider the two factors of Ornstein-Uhlenbeck process to analyze the target volatility options(TVO).Based on two factors of Ornstein-Uhlenbeck process,we presented to the forward-start TVO options pricing formula,and last,we solve the pricing problem with the Laplace transform and obtain a semi-closed form solution.The pricing formula of these options allows the speculator to take into account the underlying asset and the actual volatility to decide to buy the option or not,and it’s helpful to judge the value of the option.