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Discussion about the Option Pricing Based on the Stochastic Interest Rate

Tian Ping

Abstract

In this paper, using the simplified model of Ho-Lee model and Vasicek model, we deduce the European option pricing of stochastic interest rate under the Black-Scholes assumption. It is an extension of the option pricing model with the constant risk-free rate. We also analysis and compare it with the general case.

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Available abstract

Key concepts: Vasicek model, Black–Scholes model, Interest rate, Extension (predicate logic), Rendleman–Bartter model, Short-rate model, Econometrics, Valuation of options