Two approaches for stochastic interest rate option model

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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.
Publisher
KOREAN MATHEMATICAL SOC
Issue Date
2006-07
Language
English
Article Type
Article
Keywords

CURRENCY OPTIONS; VOLATILITY; CONTRACTS

Citation

JOURNAL OF THE KOREAN MATHEMATICAL SOCIETY, v.43, pp.845 - 858

ISSN
0304-9914
URI
http://hdl.handle.net/10203/7193
Appears in Collection
MT-Journal Papers(저널논문)
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