PRICING OPTIONS UNDER STOCHASTIC INTEREST RATE AND THE FRASCA–FARINA PROCESS: A SIMPLE, EXPLICIT FORMULA

Moawia Alghalith ()
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Moawia Alghalith: UWI, St. Augustine, Trinidad & Tobago, West Indies

Annals of Financial Economics (AFE), 2021, vol. 16, issue 01, 1-4

Abstract: Assuming a stochastic interest rate, we introduce a simple formula for pricing European options. In doing so, we provide a complete closed-form formula that does not require any numerical/computational methods. Furthermore, the model and formula are far simpler than the previous models/formulas. Our formula is as simple as the classical Black–Scholes pricing formula. Moreover, it removes the theoretical limitation of the original Black–Scholes model without any added practical complexity.

Keywords: Option pricing; stochastic interest rate; closed-form solution; the Black–Scholes PDE (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S2010495221500032

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