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Valuation of correlation options under a stochastic interest rate model with regime switching
WANG Rong-Ming * #,FAN Kun
School of Finance and Statistics, East ChinaNormal University, Shanghai 200241
*Correspondence author
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Funding: Doctoral Program Foundation of the Ministry of Education of China （No.20110076110004）, National Natural Science Foundation of China（No.11101205, 11231005, 11201006）, Program of Shanghai Subject Chief Scientist（No.14XD1401600）, the 111 Project （No.B14019）
Opened online:25 November 2014
Accepted by: none
Citation: WANG Rong-Ming,FAN Kun.Valuation of correlation options under a stochastic interest rate model with regime switching[OL]. [25 November 2014] http://en.paper.edu.cn/en_releasepaper/content/4616774
 
 
In this paper, we consider the valuation of a correlation option, a two-factor analog of a European call option,under a Hull-White interest rate model with regime switching. More specifically, the model parameters are modulated by an observable, continuous-time, finite-state Markov chain. We obtain an integral pricing formula for the correlation option by adopting the techniques of measure changes and inverse Fourier transform. Numerical analysis, via the fast Fourier transform, is provided to illustrate the practical implementation of our model.
Keywords:Correlation option; Stochastic interest rate; Regime-switching; Forward measures; Fast Fourier transform.
 
 
 

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