TWO APPROACHES FOR STOCHASTIC INTEREST RATE OPTION MODEL

We present two approaches of the stochastic interest rate European option pricing model. One is a bond numeraire approach which is applicable to a nonzero value asset. In this approach, we assume log-normality of returns of the asset normalized by a bond whose maturity is the same as the expiration...

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Bibliographic Details
Published inJournal of the Korean Mathematical Society Vol. 43; no. 4; pp. 845 - 858
Main Authors Hyun, Jung-Soon, Kim, Young-Hee
Format Journal Article
LanguageKorean
Published 대한수학회 01.07.2006
Subjects
수학
implied volatility
heat equation
stochastic interest rate option
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ISSN0304-9914
2234-3008

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Summary:We present two approaches of the stochastic interest rate European option pricing model. One is a bond numeraire approach which is applicable to a nonzero value asset. In this approach, we assume log-normality of returns of the asset normalized by a bond whose maturity is the same as the expiration date of an option instead that of an asset itself. Another one is the expectation hypothesis approach for value zero asset which has futures-style margining. Bond numeraire approach allows us to calculate volatilities implied in options even though stochastic interest rate is considered.
Bibliography:KISTI1.1003/JNL.JAKO200631037000448
G704-000208.2006.43.4.008
ISSN:0304-9914
2234-3008