Expressions of forward starting option price in Hull–White stochastic volatility model

Hiroaki Hata (), Nien-Lin Liu () and Kazuhiro Yasuda ()
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Hiroaki Hata: Hitotsubashi University
Nien-Lin Liu: Tokyo University of Science
Kazuhiro Yasuda: Hosei University

Decisions in Economics and Finance, 2022, vol. 45, issue 1, No 5, 135 pages

Abstract: Abstract We are interested in problems related to forward starting options for Hull–White stochastic volatility model. Our objective is to obtain analytical, semi-analytical, or approximated expressions of its price for simulation. To obtain an analytical representation of the price, we use Yor’s formula. However, the analytical formula is difficult to implement. Next we consider semi-analytical expressions for the price. In order to have them, we use the tower property for conditional expectations with a certain filtration and explicitly calculate it. Then, we consider an expansion expression for the price using the semi-analytical expression to have a simple expression. The semi-analytical expressions and the expansion expression can reduce computational costs and standard errors when the Monte Carlo method is used. Finally, some numerical results are given to show their accuracy and efficiency.

Keywords: Forward starting option; Hull–White stochastic volatility model; Yor’s formula; Asymptotic expansion (search for similar items in EconPapers)
JEL-codes: C32 C63 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10203-021-00343-w

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