European Call Option under Stochastic Interest Rate in a Fractional Brownian Motion with Transaction Cost

Abstract

This paper deals on the valuation of European call option price in a stochastic environment by employing three factors which are the stochastic model of the asset value, the stochastic interest rate and the transaction cost. We specify that our underlying asset and the stochastic interest rate, particularly Hull-White model, follows a fractional Brownian Motion governed by Hurst parameter H. We used the hedging and replicating technique to established the zero-coupon bond on the European option. Finally, we give a closed-form formula of the European call option price.