Using principles from the return form of arbitrage pricing (or APT), derive a PDE for the price of a European call optio

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Using Principles From The Return Form Of Arbitrage Pricing Or Apt Derive A Pde For The Price Of A European Call Optio 1 (36 KiB) Viewed 79 times

Using principles from the return form of arbitrage pricing (or APT), derive a PDE for the price of a European call option on a non-dividend paying stock when interest rates are random, and the short rate follows Cox-Ingersoll-Ross dynamics. That is: dS = uSdt + oSdzı dr = a(b – r)dt + cvrdzą where Z1 and 22 are correlated Winner processes with correlation coefficient p. (i.e. E(dz, dzz)=pdt) (Hint: Your answer may contain a market price of risk.) =