HULL WHITE OPTION PRICING MODEL The Black-Scholes option pricing model which is widely used to price options

is found to misprice options due to certain aspects of the option which it does not capture, most prominent among them being the constant volatility assumption made by the model. Hull and White in their model were among the first to incorporate the stochastic nature of volatility as compared to a constant volatility assumed by Black-Scholes model. In the initial stages they assumed the stochastic volatility and the asset price to be uncorrelated but at latter stage they also incorporated the case when the volatility and asset prices are correlated According to the Hull-White Model the stochastic process followed by the stock price and volatility is Here S refers to the stock price while V refers to the instantaneous variance rate. drift rates of stock price and V respectively. and capture the