Closed-Form Solutions For European And Digital Calls In The Hull And White Stochastic Volatility Model And Their Relation To Locally R-Minimizing And Delta Hedges

Christian-Oliver Ewald (), Klaus Reiner Schenk-Hoppé () and Zhaojun Yang
Additional contact information
Zhaojun Yang: Human University, School of Economics and Trade, China

No 07-11, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper derives an analytic expression for the distribution of the average volatility ds in the stochastic volatility model of Hull and White. This result answers a longstanding question, posed by Hull and White (Journal of Finance 42, 1987), whether such an analytic form exists. Our findings are applied to obtain closed-form solutions for European and Digital call option prices. The paper also provides an explicit solution for the Delta hedge of a European call. Moreover, it is proved that the Delta hedge under the minimal martingale measure coincides with the locally R-minimizing hedge in the model considered here.

Keywords: Stochastic volatility models; incomplete markets; Delta hedging; locally R-minimizing hedging strategies Malliavin calculus (search for similar items in EconPapers)
JEL-codes: G13 C61 C63 (search for similar items in EconPapers)
Date: Written

Downloads: (external link)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=988068 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:chf:rpseri:rp0711

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute
Series data maintained by Marilyn Barja ().