New model improves accuracy and efficiency in pricing long-dated options.
The article discusses a method to improve the accuracy and efficiency of pricing and hedging derivative products using a local volatility model with a stochastic interest rate. By incorporating a correction term based on Malliavin calculus, the model can better account for the impact of interest rate volatility and correlation. The researchers propose a two-step calibration process and a scheme to enhance the convergence of Monte Carlo simulations for pricing.