Valuation of European volatility options

in Gruenbichler-Longstaff (1996) model

square-root diffusion framework

— parameter dictionary & web service function

from vol_pricing_formula import calculate_option_value

model parameters

PARAMS={
‘V0’ : ‘current volatility level’,
‘kappa’ : ‘mean reversion factor’,
‘theta’ : ‘long-run mean of volatility’,
‘sigma’ : ‘volatility of volatility’,
‘zeta’ : ‘factor of the expected volatility risk premium’,
‘T’ : ‘time horizon in years’,
‘r’ : ‘risk-free interest rate’,
‘K’ : ‘strike’
}

function for web service

def get_option_value(data):
”’ A helper function for web service. ”’
errorline = ‘Missing parameter %s (%s)\n’
errormsg = ”
for para in PARAMS:
if not data.has_key(para):

check if all parameters are provided

errormsg += errorline % (para, PARAMS[para])
if errormsg != ”:
return errormsg
else:
result = calculate_option_value(
float(data[‘V0’]),
float(data[‘kappa’]),
float(data[‘theta’]),
float(data[‘sigma’]),
float(data[‘zeta’]),
float(data[‘T’]),
float(data[‘r’]),
float(data[‘K’])
)
return str(result)

To begin with, we add the path of the aforementioned Python scripts:

In  [ 87 ]: import sys

sys.path.append(“../python/volservice”)

#   adjust  if  necessary   to  your    path

We use the library Werkzeug to handle our WSGI application-based web service (recall that

Werkzeug is an integral part of Flask). To this end, we need to import some functions from

Werkzeug sublibraries:

In  [ 88 ]: from werkzeug.wrappers import Request,  Response

Furthermore, for our core WSGI application to follow, we need the function

get_option_value that we defined earlier:

In  [ 89 ]: from vol_pricing_service import get_option_value

The only thing that remains is to implement the WSGI application (function) itself. This

function might in our case look as follows:

In  [ 90 ]: def application(environ,    start_response):

request =   Request(environ)

#   wrap    environ in  new object

text    =   get_option_value(request.args)

#   provide all parameters  of  call    to  function

#   get back    either  error   message or  option  value

response    =   Response(text,  mimetype=‘text/html’)

#   generate    response    object  based   on  the returned    text