|Institution:||Illinois Institute of Technology|
|Keywords:||M.S. in Applied Mathematics, July 2014|
|Full text PDF:||http://hdl.handle.net/10560/3355|
Classical option pricing schemes have an ideal assumption that a single interest rate is used as risk free discounting rate. This assumption has been already relaxed due to deteriorating credit market. In this paper, we assume that risk free lending and borrowing rates are di erent. Under di erential interest rates setup, a no-arbitrage price band rather than a unique price is calculated. We extend this scheme to a jump di usion model. Under mild conditions, option prices can be calculated explicitly. We illustrate the pricing scheme through a European style call option. Numerical results show that funding spread between lending and borrowing interest rates has signi cant impact on the length of the option's no-arbitrage price band.