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...

Università della Svizzera italiana

A new approach to check the free boundary of single factor interest rate put option

Allegretto, Walter ; Barone-Adesi, Giovanni ; Dinenis, Elias ; Lin, Yangpin ; Sorwar, Ghulam

The application of Green’s theorem to free boundary problems in option pricing leads to a new metric to measure numerical errors. Free boundaries for a variety of interest rate models are computed more accurately through minimization of our metric.