Pricing of Game Options in a market with stochastic interest rates

Abstract

An in depth study of the pricing of Game contingent claims under a general diffusion market model, in which interest rate is non constant, is presented.

With the idea of providing a few numerical examples of the valuation of such claims, we present a detailed description of a Bootstrapping procedure to obtain interest rate information from Swaps rates. We also present a Stripping procedure that can be used to obtain initial spot (caplet) volatility from Market quotes on Caps/FLoors. These methods are of general application and could be used in the calibration of diffusion models of interest rate.

Then we show several examples of calibration of the Hull--White model of interest rates. Our calibration examples are later used in the numerical approximation of the value of a particular form of Game option.