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Activity Number: 415
Type: Contributed
Date/Time: Wednesday, August 5, 2009 : 8:30 AM to 10:20 AM
Sponsor: Business and Economic Statistics Section
Abstract - #304224
Title: Option Pricing under Random Field Interest Rate Model with Stochastic Volatility
Author(s): Baowei Xu*+ and Chuanshu Ji
Companies: The University of North Carolina at Chapel Hill and The University of North Carolina at Chapel Hill
Address: 180 BPW Club RD, Apt T8, Carrboro, NC, 27510,
Keywords: Random field ; Interest rate model ; Stochastic volatility ; Option pricing
Abstract:

In this paper, we will study the problem of simple interest rate dependent option (caplet) pricing under random field interest rate model. This will be a generalization of Kennedy(1994) paper in the sense that we will have stochastic instead of constant volatility. In the computation of the option price, we have proposed a log-normal approximation of the volatility term. The approximation will enable us to compute the option price much faster than the otherwise Monte Carlo method.

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