wilmott.com

Hi AllI am looking for some help with regards to a closed form solution for pricing a caplet under the two-factor vasicek model where both the short rate and the short-term mean-reversion level are stochastic. I have calculated a formula and the answers seem plausible when tested however I would greatly appreciate it if someone could help check my work.The version of the two-factor vasicek model which I am using is discussed by Hibbert, Mowbray and Turnbull (http://www.actuaries.org.uk/research-an ... l-planning) and is provided as one of the options for modelling the real interest rate in the Barrie & Hibbert ESG (http://www.pwc.com/en_ZA/za/assets/pdf/ ... vey-08.pdf - page 9: Interest Rate Model Calibration).Although Hibbert et al's paper provides a formula for the bond price, it does not provide a closed form solution for the price of a European option on a pure discount bond. I have calculated such a formula, using the approach by Brigo and Mercurio for the G2++, however I am fairly inexperienced with regards to Financial Maths and Stochastic Finance. I have tried to find other papers on the internet discussing this model (and possibly providing a formula to price a European option on a PDB) however I have not had any success.Please let me know if you would be willing to help out - I can send you my workings and / or my implementation of the model in VBA.RegardsChris