European Option Pricing under Fractional Stochastic Interest Rate Model

Abstract:

Under the assumption of stock price and interest rate obeying the stochastic differential equation driven by fractional Brownian motion, we establish the mathematical model for the financial market in fractional Brownian motion setting. Using the risk hedge technique, fractional stochastic analysis and PDE method, we obtain the general pricing formula for the European option with fractional stochastic interest rate. By choosing suitable Hurst index, we can calibrate the pricing model, so that the price can be used as the actual price of option and control the risk management

• Periodical: Advanced Materials Research (Volumes 171-172)
• Pages: 787-790
• DOI: https://doi.org/10.4028/www.scientific.net/AMR.171-172.787
• Online since: December 2010
• Authors: Wen Li Huang, Gui Mei Liu, Sheng Hong Li, An Wang
• Keywords: Fractional Brownian Motion, Fractional Vasicek Model, Option Pricing, Zero Coupon Bond

References

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