A generalization of the Hull and White formula with applications to option pricing approximation (Q854283)

The main goal of this paper is to obtain a new generalization of the classical Hull and White formula to the correlated case. The basic idea is to expand option prices around the classical Hull and White expression by means of the Malliavin calculus. It becomes a natural tool for this problem, where the average future volatility is not adapted. This approach does not reduce the dimensionality of the problem, but it decomposes option prices as a sum of the same derivative price if there were no correlation and a correction due to correlation. This decomposition allows studying the effect of correlation on the option prices.