2020/05/28 by Fabio Antonelli, Antonelli, Fabio, Alessandro Ramponi +3
Economics, Econometrics and Finance · #Computational Finance (q-fin.CP) #FOS: Economics and business #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.2005.14063
openalex publication_date 2020/05/28 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
In this paper we present a simple, but new, approximation methodology for\npricing a call option in a Black & Scholes market characterized by stochastic\ninterest rates. The method, based on a straightforward Gaussian moment matching\ntechnique applied to a conditional Black & Scholes formula, is quite general\nand it applies to various models, whether affine or not. To check its accuracy\nand computational time, we implement it for the CIR interest rate model\ncorrelated with the underlying, using the Monte Carlo simulations as a\nbenchmark. The method's performance turns out to be quite remarkable, even when\ncompared with analogous results obtained by the affine approximation technique\npresented in Grzelak and Oosterlee (2011) and by the expansion formula\nintroduced in Kim and Kunimoto (1999), as we show in the last section.\n