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Pricing Options Under Stochastic Interest Rate And The Frasca–Farina Process: A Simple, Explicit Formula

Author

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  • MOAWIA ALGHALITH

    (UWI, St. Augustine, Trinidad & Tobago, West Indies)

Abstract

Assuming a stochastic interest rate, we introduce a simple formula for pricing European options. In doing so, we provide a complete closed-form formula that does not require any numerical/computational methods. Furthermore, the model and formula are far simpler than the previous models/formulas. Our formula is as simple as the classical Black–Scholes pricing formula. Moreover, it removes the theoretical limitation of the original Black–Scholes model without any added practical complexity.

Suggested Citation

  • Moawia Alghalith, 2021. "Pricing Options Under Stochastic Interest Rate And The Frasca–Farina Process: A Simple, Explicit Formula," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 16(01), pages 1-4, March.
    • Handle: RePEc:wsi:afexxx:v:16:y:2021:i:01:n:s2010495221500032
    DOI: 10.1142/S2010495221500032
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    Cited by:

    1. Moawia Alghalith & Wing-Keung Wong, 2022. "Option Pricing Under an Abnormal Economy: using the Square Root of the Brownian Motion," Advances in Decision Sciences, Asia University, Taiwan, vol. 26(Special), pages 4-18, December.
    2. Moawia Alghalith, 2023. "New developments in econophysics: Option pricing formulas," Papers 2301.11078, arXiv.org.

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