Closed-Form Solutions For European And Digital Calls In The Hull And White Stochastic Volatility Model And Their Relation To Locally R-Minimizing And Delta Hedges
This paper derives an analytic expression for the distribution of the average volatility ds in the stochastic volatility model of Hull and White. This result answers a longstanding question, posed by Hull and White (Journal of Finance 42, 1987), whether such an analytic form exists. Our findings are applied to obtain closed-form solutions for European and Digital call option prices. The paper also provides an explicit solution for the Delta hedge of a European call. Moreover, it is proved that the Delta hedge under the minimal martingale measure coincides with the locally R-minimizing hedge in the model considered here.
|Date of creation:||Aug 2006|
|Contact details of provider:|| Web page: http://www.SwissFinanceInstitute.ch|
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