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A generalization of the Hull and White formula with applications to option pricing approximation

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Abstract

By means of Malliavin calculus we see that the classical Hull and White formula for option pricing can be extended to the case where the volatility and the noise driving the stock prices are correlated. This extension will allow us to describe the effect of correlation on option prices and to derive approximate option pricing formulas.

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Correspondence to Elisa Alòs.

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Supported by grants CICYT BFM2003-04294 and MCYT SEC2003-04476.

A previous version of this paper has benefited from helpful comments by two anonymous referees.

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Alòs, E. A generalization of the Hull and White formula with applications to option pricing approximation. Finance Stoch 10, 353–365 (2006). https://doi.org/10.1007/s00780-006-0013-5

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  • DOI: https://doi.org/10.1007/s00780-006-0013-5

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