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Comment on “Option pricing under the Merton model of the short rate” by Kung and Lee [Math. Comput. Simul. 80 (2009) 378–386]

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  • Cui, Zhenyu
  • Mcleish, Don

Abstract

In this note, we correct the formula given in Ref. [3] for European call and put option under Merton's model of the short rate. We give a probabilistic derivation making use of the “change of numeraire” technique which is simpler and more standard.

Suggested Citation

  • Cui, Zhenyu & Mcleish, Don, 2010. "Comment on “Option pricing under the Merton model of the short rate” by Kung and Lee [Math. Comput. Simul. 80 (2009) 378–386]," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 81(1), pages 1-4.
    • Handle: RePEc:eee:matcom:v:81:y:2010:i:1:p:1-4
    DOI: 10.1016/j.matcom.2010.06.006
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    References listed on IDEAS

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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Bernard, Carole & Le Courtois, Olivier & Quittard-Pinon, François, 2008. "Pricing derivatives with barriers in a stochastic interest rate environment," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2903-2938, September.
    3. Kung, James J. & Lee, Lung-Sheng, 2009. "Option pricing under the Merton model of the short rate," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 80(2), pages 378-386.
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