scholarly journals Pricing Option with Stochastic Interest Rates and Transaction Costs in Fractional Brownian Markets

2018 ◽  
Vol 2018 ◽  
pp. 1-8
Author(s):  
Lina Song ◽  
Kele Li
Keyword(s):  
Interest Rates ◽  
Transaction Costs ◽  
Estimation Methods ◽  
European Option ◽  
Stochastic Interest Rates ◽  
European Option Pricing ◽  
Stochastic Interest ◽  
Two Factors ◽  
Parameter Estimation Methods ◽  
Coupon Bond

This work deals with European option pricing problem in fractional Brownian markets. Two factors, stochastic interest rates and transaction costs, are taken into account. By the means of the hedging and replicating techniques, the new equations satisfied by zero-coupon bond and the nonlinear equation obeyed by European option are established in succession. Pricing formulas are derived by the variable substitution and the classical solution of the heat conduction equation. By the mathematical software and the parameter estimation methods, the results are reported and compared with the data from the financial market.

AN ANALYTICAL APPROXIMATION FOR EUROPEAN OPTION PRICES UNDER STOCHASTIC INTEREST RATES

2015 ◽  
Vol 18 (04) ◽  
pp. 1550026 ◽  
Author(s):  
HIDEHARU FUNAHASHI
Keyword(s):  
Interest Rates ◽  
Analytical Approximation ◽  
Option Prices ◽  
European Option ◽  
Stochastic Interest Rates ◽  
Option Markets ◽  
Stochastic Nature ◽  
Volatility Models ◽  
Stochastic Interest ◽  
High Volatility

This paper extends the Wiener–Itô chaos expansion approach proposed by Funahashi & Kijima (2015) to an equity-interest-rate hybrid model for the pricing of European contingent claims with special emphasis on calibration to the option markets. Our model can capture the volatility skew and smile of option markets, as well as the stochastic nature of interest rates. Further, the proposed method is applicable to widely used option pricing models such as local volatility models (LVM), stochastic volatility models (SVM), and their combinations with the stochastic nature of interest rates; hence, it is suitable for practical purposes. Through numerical examples, we show that our approximation is quite accurate even for long-maturity and/or high-volatility cases.

A Hybrid Model for Equity Indices and Stochastic Interest Rates

2012 ◽  
Author(s):  
Jan F. Baldeaux ◽  
Man Chung Fung ◽  
Katja Ignatieva ◽  
Eckhard Platen
Keyword(s):  
Interest Rates ◽  
Hybrid Model ◽  
Stochastic Interest Rates ◽  
Stochastic Interest ◽  
Equity Indices
Sign in / Sign up

Export Citation Format

Share Document