1999/04/08 by Craig Liu, Liu, Craig, D. F. Wang +1
Physics and Astronomy · #Condensed Matter (cond-mat) #FOS: Physical sciences #cond-mat
paper · pdf · doi:10.48550/arxiv.cond-mat/9904110
12 pages, submitted to Int. J. Theor. and Applied Finance
arxiv created 1999/04/08 · arxiv updated 2009/11/30
In this work, we consider the issue of pricing exchange options and spread options with stochastic interest rates. We provide the closed form solution for the exchange option price when interest rate is stochastic. Our result holds when interest rate is modeled with a stochastic term structure of general form, which includes Vasicek model, CIR term structure, and other well-known term structure models as special cases. In particular, we have discussed the possibility of using our closed form solution as a control variate in pricing spread options with stochastic interest rate.