Development of Computational Algorithms for Pricing European Bond Options under the Influence of Macro-economic Conditions

A stochastic process of Vasicek type describing the short rate is considered, where thethree governing parameters {φ, α, σ}, with φ for the market fitting, α for the reversionand σ for the volatility, would depend on the macro-economic condition modeled as anindependent birth-death process on a finite state space. Computational algorithms aredeveloped for evaluating the prices of European call options defined on a zero-coupondiscount bond characterized by the above stochastic process. Numerical examples areprovided based on real data so as to demonstrate the speed and efficiency of the proposedalgorithms