Chapter 13: Calibrating the Hull-White extended Vasicek approach

Overview

In §7.3 we examine the pricing of contingent claims within the HW-extended Vasicek framework. The time t price of a European call option, with expiry time T , t, T ˆˆ [0, T *] and strike price X ,onazerocouponbondofmaturity s is given by ^[1] :

where

In §7.5 we showed for the initial values of B ( t, T ) i.e. B (0, T ), may be extracted from the observed term structure. Here we examine the approach to calibrating the HW extended Vasicek model to a given set of term structure data.

^[1] See equations (7.20)-(7.22) of Chapter 7.