New pricing model revolutionizes financial contracts with dual risk factors.
A new method was developed to price financial contracts affected by both stock price and interest rate risks. The researchers used a combination of two well-known models to create a pricing framework. They assumed that the correlation between future stock prices and interest rates is zero. By applying this method, they calculated the price of a stock option and compared it to prices from other models. The differences in prices were found to be small, suggesting the new method is effective for pricing purposes.