A NEW FINITE ELEMENT METHOD FOR PRICING OF BOND OPTIONS UNDER TIME INHOMOGENEOUS AFFINE TERM STRUCTURE MODELS OF INTEREST RATES

摘要

In this paper we propose a new finite element method for pricing of bond options under time inhomogeneous one-factor affine models of short interest rates: the Hull–White model and the extended CIR model. The stability and weak convergence are established. Numerical results are presented to examine the method and to compare the calibrated models.