Option pricing under the Heston model where the interest rate follows the Vasicek model
Zhidong Guo
Abstract
Zhidong Guo
Abstract
In this paper, we incorporate the stochastic nature of the short rate and volatility into the option pricing model. Vasicek–Heston hybrid model is proposed. This model allows for negative interest rate. With the technique of the numeraire change, pricing formula for European call options is derived. Finally, some numerical illustrations are given by computing European call option prices.
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In this paper, we incorporate the stochastic nature of the short rate and volatility into the option pricing model. Vasicek–Heston hybrid model is proposed. This model allows for negative interest rate. With the technique of the numeraire change, pricing formula for European call options is derived. Finally, some numerical illustrations are given by computing European call option prices.
Key concepts: Vasicek model, Heston model, Short-rate model, Interest rate, Mathematics, Econometrics, Applied mathematics, Economics