Comment on 'Option Pricing Under the Merton Model of the Short Rate'

Abstract

This is a short comment on Kung and Lee's paper. In this note, we show that the formulae given in Kung and Lee (2009) for European call and put option under Merton's model of the short rate are incorrect. We give the correct derivations making use of the "change of numeraire" technique which is simpler and more standard.

Keywords: Stochastic interest rates, change of numeraire, Merton short rate model

JEL Classification: G13