TITLE:
A Linear Regression Approach for Determining Option Pricing for Currency-Rate Diffusion Model with Dependent Stochastic Volatility, Stochastic Interest Rate, and Return Processes
AUTHORS:
Raj Jagannathan
KEYWORDS:
Option Pricing, Interest-Rate Parity Condition, Black-Scholes Model, Linear Regression Approach, Spot Option, Ito Calculus
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.8 No.1,
February
28,
2018
ABSTRACT: A three-factor exchange-rate diffusion model that includes three stochastically-dependent Brownian motion processes, namely, the domestic interest rate process, volatility process and return process is considered. A linear regression approach that derives explicit expressions for the distribution function of log return of foreign exchange rate is derived. Subsequently, a closed form workable formula for the call option price that has an algebraic expression similar to a Black-Scholes model, which facilitates easier study, is discussed.