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TWO APPROACHES FOR STOCHASTIC INTEREST RATE OPTION MODEL
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 Title & Authors
TWO APPROACHES FOR STOCHASTIC INTEREST RATE OPTION MODEL
Hyun, Jung-Soon; Kim, Young-Hee;
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 Abstract
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.
 Keywords
stochastic interest rate option;implied volatility;heat equation;
 Language
English
 Cited by
 References
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