Option pricing under the Heston model where the interest rate follows the Vasicek model

Abstract

In this paper, we incorporate the stochastic nature of the short rate and volatility into the option pricing model. Vasicek–Heston hybrid model is proposed. This model allows for negative interest rate. With the technique of the numeraire change, pricing formula for European call options is derived. Finally, some numerical illustrations are given by computing European call option prices.