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Abstract
We consider the Black-Scholes and Heston models and generalize them to stochastic interest rates and maturity-dependent volatilities. In the Black-Scholes case, we solve the extended model and provide a concrete form for the term structure of volatilities. In the Heston case, we prove that, under some conditions, the generalized model is equivalent to a hybrid model and we find semi-closed-form solutions in the Hull and White and CIR cases.
TOPICS: Options, statistical methods, fixed income and structured finance
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US and Overseas: +1 646-931-9045
UK: 0207 139 1600