- Pricing long-maturity equity and FX derivatives with stochastic interest rates and stochastic equity
- Number of pages
- Amsterdam: Faculteit Economie en Bedrijfskunde
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
In this paper we extend the stochastic volatility model of Schoebel and Zhu (1999) by including stochastic interest rates. Furthermore we allow all driving model factors to be instantaneously correlated with each other, i.e. we allow for a correlation between the instantaneous interest rates, the volatilities and the underlying stock returns. By deriving the characteristic function of the log-asset price distribution, we are able to price European stock options in closed-form by Fourier inversion. Furthermore we present a Foreign Exchange generalization and show how the pricing of Forward-starting options like cliquets can be performed. Additionally we discuss the practical implementation of these new models.
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.