A NEW FINITE ELEMENT METHOD FOR PRICING OF BOND OPTIONS UNDER TIME INHOMOGENEOUS AFFINE TERM STRUCTURE MODELS OF INTEREST RATES

Hongtao Yang ()
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Hongtao Yang: Department of Mathematics, University of Louisiana at Lafayette, Lafayette, LA 70504-1010, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2007, vol. 10, issue 01, 31-49

Abstract: In this paper we propose a new finite element method for pricing of bond options under time inhomogeneous one-factor affine models of short interest rates: the Hull–White model and the extended CIR model. The stability and weak convergence are established. Numerical results are presented to examine the method and to compare the calibrated models.

Keywords: Inhomogeneous affine model; calibration; bond option; finite element method (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1142/S021902490700410X

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