A generalization of reset options pricing formulae with stochastic interest rates |
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Authors: | Shu Jin Li Sheng Hong Li |
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Institution: | a Department of Mathematics, YuQuan Campus, ZheJiang University, 310027 HangZhou, People’s Republic of China b JiangSu Teachers College of Technology, Changzhou, People’s Republic of China |
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Abstract: | A generalization of reset call options with predetermined dates is derived in the case of time-dependent volatility and time-dependent interest rate by applying martingale method and change of nume?aire or change of probability measure. An analytical pricing formula for the reset call option is also obtained when the interest rate follows an extended Vasicek’s model. Numerical results show that the correlated coefficient between the stock price and interest rate is almost unacted on the price of reset call option with short maturity and Monte Carlo method is inefficient. Monte Carlo method should be only used if there is no closed-formed solution for option pricing. |
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Keywords: | G12 G13 G30 |
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