2011Journal of Mathematical FinanceOpen access

European Option Pricing for a Stochastic Volatility Lévy Model with Stochastic Interest Rates

Sarisa Pinkham, Pairote Sattayatham

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Abstract

We present a European option pricing when the underlying asset price dynamics is governed by a linear combination of the time-change Lévy process and a stochastic interest rate which follows the Vasicek process. We obtain an explicit formula for the European call option in term of the characteristic function of the tail probabilities.

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We present a European option pricing when the underlying asset price dynamics is governed by a linear combination of the time-change Lévy process and a stochastic interest rate which follows the Vasicek process. We obtain an explicit formula for the European call option in term of the characteristic function of the tail probabilities.

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Available abstract

We present a European option pricing when the underlying asset price dynamics is governed by a linear combination of the time-change Lévy process and a stochastic interest rate which follows the Vasicek process. We obtain an explicit formula for the European call option in term of the characteristic function of the tail probabilities.

Key concepts: Vasicek model, Interest rate, Rendleman–Bartter model, Stochastic volatility, Call option, Economics, Valuation of options, Short-rate model

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