Università della Svizzera italiana

Valuation of derivatives based on CKLS interest rate models

Barone-Adesi, Giovanni ; Istituto di finanza (IFin), Facoltà di scienze economiche, Università della Svizzera italiana, Svizzera ; Allegretto, Walter ; Dinenis, Elias ; Sorwar, Ghulam

The CKLS (1992) short-term risk-free interest rate process leads to valuation model for both default free bonds and contingent claims that can only be solved numerically for the general case. Valuation equations of this nature in the past have been solved using the Crank Nicholson scheme. In this paper, we introduce a new numerical scheme – the Box method, and compare it with the traditional...