Mellin Transform Method for European Option Pricing with Hull-White Stochastic Interest Rate

Abstract EN

Even though interest rates fluctuate randomly in the marketplace, many option-pricing models do not fully consider their stochastic nature owing to their generally limited impact on option prices.

However, stochastic dynamics in stochastic interest rates may have a significant impact on option prices as we take account of issues of maturity, hedging, or stochastic volatility.

In this paper, we derive a closed form solution for European options in Black-Scholes model with stochastic interest rate using Mellin transform techniques.