Abstract
This paper studies the European option pricing on the zero-coupon bond in which the Skew Vasicek model uses to predict the interest rate amount. To do this, we apply the skew Brownian motion as the random part of the model and show that results of the model predictions are better than other types of the model. Besides, we obtain an analytical formula for pricing the zero-coupon bond and find the European option price by constructing a portfolio that contains the option and a share of the bond. Since the skew Brownian motion is not a martingale, thus we add transaction costs to the portfolio, where the time between trades follows the exponential distribution. Finally, some numerical results are presented to show the efficiency of the proposed model.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
