Bond option pricing under the CKLS model
Consider the European call option written on a zero coupon bond. Suppose the call option has maturity T and strike price K while the bond has maturity S T . We propose a numerical method for evaluating the call option price under the Chan, Karolyi, Longstaff and Sanders (CKLS) model in which t...
| Main Authors: | , , |
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| Format: | Conference or Workshop Item |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://eprints.sunway.edu.my/200/ http://eprints.sunway.edu.my/200/1/Pooi%20Ah%20Hin%20-%20Bond%20option%20pricing%20under%20the%20CKLS%20model.pdf |
| _version_ | 1848801769898901504 |
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| author | Khor, C. Y. Pooi, Ah Hin * Ng, Kok Haur |
| author_facet | Khor, C. Y. Pooi, Ah Hin * Ng, Kok Haur |
| author_sort | Khor, C. Y. |
| building | SU Institutional Repository |
| collection | Online Access |
| description | Consider the European call option written on a zero
coupon bond. Suppose the call option has maturity T and
strike price K while the bond has maturity S T . We propose a numerical method for evaluating the call option
price under the Chan, Karolyi, Longstaff and Sanders (CKLS)
model in which the increment of the short rate over a time
interval of length dt , apart from being independent and
stationary, is having the quadratic-normal distribution with
mean zero and variance dt. The key steps in the numerical
procedure include (i) the discretization of the CKLS model;
(ii) the quadratic approximation of the time-T bond price as a function of the short rate rT at time T; and (iii) the
application of recursive formulas to find the moments of
r(t+dt) given the value of r(t). The numerical results thus
found show that the option price decreases as the parameter
in the CKLS model increases, and the variation of the
option price is slight when the underlying distribution of the increment departs from the normal distribution. |
| first_indexed | 2025-11-14T21:12:44Z |
| format | Conference or Workshop Item |
| id | sunway-200 |
| institution | Sunway University |
| institution_category | Local University |
| language | English |
| last_indexed | 2025-11-14T21:12:44Z |
| publishDate | 2012 |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | sunway-2002019-03-13T03:49:06Z http://eprints.sunway.edu.my/200/ Bond option pricing under the CKLS model Khor, C. Y. Pooi, Ah Hin * Ng, Kok Haur HG Finance QA Mathematics Consider the European call option written on a zero coupon bond. Suppose the call option has maturity T and strike price K while the bond has maturity S T . We propose a numerical method for evaluating the call option price under the Chan, Karolyi, Longstaff and Sanders (CKLS) model in which the increment of the short rate over a time interval of length dt , apart from being independent and stationary, is having the quadratic-normal distribution with mean zero and variance dt. The key steps in the numerical procedure include (i) the discretization of the CKLS model; (ii) the quadratic approximation of the time-T bond price as a function of the short rate rT at time T; and (iii) the application of recursive formulas to find the moments of r(t+dt) given the value of r(t). The numerical results thus found show that the option price decreases as the parameter in the CKLS model increases, and the variation of the option price is slight when the underlying distribution of the increment departs from the normal distribution. 2012-05 Conference or Workshop Item PeerReviewed text en http://eprints.sunway.edu.my/200/1/Pooi%20Ah%20Hin%20-%20Bond%20option%20pricing%20under%20the%20CKLS%20model.pdf Khor, C. Y. and Pooi, Ah Hin * and Ng, Kok Haur (2012) Bond option pricing under the CKLS model. In: Regional Conference on Applied and Engineering Mathematics (2nd). Proceedings, 30 - 31 May 2012, Penang. |
| spellingShingle | HG Finance QA Mathematics Khor, C. Y. Pooi, Ah Hin * Ng, Kok Haur Bond option pricing under the CKLS model |
| title | Bond option pricing under the CKLS model |
| title_full | Bond option pricing under the CKLS model |
| title_fullStr | Bond option pricing under the CKLS model |
| title_full_unstemmed | Bond option pricing under the CKLS model |
| title_short | Bond option pricing under the CKLS model |
| title_sort | bond option pricing under the ckls model |
| topic | HG Finance QA Mathematics |
| url | http://eprints.sunway.edu.my/200/ http://eprints.sunway.edu.my/200/1/Pooi%20Ah%20Hin%20-%20Bond%20option%20pricing%20under%20the%20CKLS%20model.pdf |