Effects of Stochastic Interest Rates and Volatility on Contingent Claims (Revised Version)

Naoto Kunitomo and Yong-Jin Kim
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Naoto Kunitomo: Faculty of Economics, University of Tokyo
Yong-Jin Kim: Faculty of Economics, Tokyo Metropolitan University

No CIRJE-F-129, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: We investigate the effects of the stochastic interest rates and the volatility f the underlying asset price on the contingent claim prices including futures and options prices. The futures price can be decomposed into the forward price and the additional terms and the options price can be decomposed into the Black-Scholes formula and several additional terms via the asymptotic expansion approach in the small disturbance asymptotics developed by Kunitomo and Takahashi(1995,1998,2001), which is based on Malliavin-Watanabe Calculus in stochastic analysis. We illustrate our new formulae and their numerical accuracy by using some modi ed CIR type processes for the short term interest rates and stochastic volatility.

Pages: 34 pages
Date: 2001-09
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2001cf129

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