Consider market with one stock and one bond

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Consider a market with one stock and one bond, with the following assumptions on parameters: mu and sigma > 0 are constant but the interest rate is r (t) = a + bt for some constants a and b. Find the value at t = 0 for the European call option with the strike price K and maturity T. Note that this is the same option as in the usual Black-Scholes formula but the assumptions on the interest rate are different. Your answer has to be explicit in the sense that one could feed it into a computer program, just like the Black-Scholes formula. The formula may contain integrals. It is not necessary to simplify the formula.

Reference no: EM131462303

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