Khor, C. Y. and Pooi, Ah Hin * and Ng, Kok Haur (2012) Bond option pricing under the CKLS model. In: Regional Conference on Applied and Engineering Mathematics (2nd). Proceedings, 30  31 May 2012, Penang.

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Pooi Ah Hin  Bond option pricing under the CKLS model.pdf  Accepted Version Download (434kB)  Preview 
Abstract
Consider the European call option written on a zero coupon bond. Suppose the call option has maturity T and strike price K while the bond has maturity S T . We propose a numerical method for evaluating the call option price under the Chan, Karolyi, Longstaff and Sanders (CKLS) model in which the increment of the short rate over a time interval of length dt , apart from being independent and stationary, is having the quadraticnormal distribution with mean zero and variance dt. The key steps in the numerical procedure include (i) the discretization of the CKLS model; (ii) the quadratic approximation of the timeT bond price as a function of the short rate rT at time T; and (iii) the application of recursive formulas to find the moments of r(t+dt) given the value of r(t). The numerical results thus found show that the option price decreases as the parameter in the CKLS model increases, and the variation of the option price is slight when the underlying distribution of the increment departs from the normal distribution.
Item Type:  Conference or Workshop Item (Paper) 

Additional Information:  First author with Faculty of Computing and Informatics, Multimedia University; 2nd author with Sunway University Business School; 3rd author with Institute of Mathematical Sciences, Faculty of Science, University of Malaya. 
Uncontrolled Keywords:  zero coupon bond; CKLS model; option price 
Subjects:  H Social Sciences > HG Finance Q Science > QA Mathematics 
Divisions:  Sunway University > School of Mathematical Sciences > Department of Applied Statistics Others > Non Sunway Academics 
Depositing User:  Ms. Molly Chuah 
Date Deposited:  11 Jan 2014 14:29 
Last Modified:  13 Mar 2019 03:49 
URI:  http://eprints.sunway.edu.my/id/eprint/200 
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