Option Pricing For Real Estate With Stochastic Interest Rate

In recent years, worldwide, the prosperity of the real estate industry has played a pivotal role in the world’s economic growth. In China, in recent years, with the completion of the housing system reform, the land tenure regimes to further improve and the strong expectations of the RMB appreciation, the real estate industry comes into an unprecedented period of prosperity. However, with the U.S. sub-prime credit crisis and the depression of international financial environment, in order to maintain China’s sustained and healthy development of the economy, the relevant departments issued a series of relevant measures, including interest rates, tax adjustments, of which the interest rate adjustments in the recent times more frequently. This series of policies and regulations implemented, will enable China’s real estate industry to be more healthy development, but also will inevitably affect the degree of investors in the property industry boom forecast. The real estate industry and investors, banks are exploring new business models, innovative varieties came into being.The so-called "real estate options," is solely the buyer to enjoy within the prescribed period of validity according to the agreed price from the seller the right to buy the underlying property, but not at the same time bear the obligation to buy the property. Real estate options market allows participants to avoid the risks of the direct purchase or sale the underlying asset, and such a market is growing rapidly. Therefore, a simple and effective pricing model is needed, while the real estate options, real options as a species have their own unique aspect. For example, real estate in the subject matter of changing the interest rate is very sensitive. Therefore, it is flawed that the traditional B-S pricing model considers the no risk-free rate as a constant. If we can in the real estate option pricing model, the introduction of stochastic interest rates, a class for real estate is very sensitive to interest rate changes in the assets of the derivatives has a very important theoretical and practical significance. If risk-free rate is assumed to obey Vasicek interest rate model, we get the real estate option pricing formula when the risk-free rate random change, and then we use Monte Carlo simulation variance reduction techniques to derive option pricing method in which the interest rates subjected to the CIR model. Based on the simulation of two examples we compare of traditional real estate options pricing methods and the pricing methods in which the interest rates subjected to the CIR model.In this paper, the mathematical model and simulation examples are combined to study real estate options pricing under the random condition of the interest rate.The principal tasks include the following(1) By reading a large number of domestic and foreign literature, this paper describe the real options and interest rate term structure theory and its development history, analyze and summarize a variety of interest rate models, select the appropriate stochastic interest rate model into the real estate option pricing model.(2) This paper recall the traditional real estate B-S option pricing method, points out that the risk-free rate is assumed to be constant when the defects and shortcomings, through the introduction of stochastic interest rate model, we give the real estate pricing formula under the conditions of random interest rate.(3) This paper gives the option pricing formula when risk-free interest rate subjected to the Vasicek interest rate model, and gives the analytical solution and the pricing method were evaluated.(4) We establish an option pricing method when risk-free rate subjected to CIR mode, and the use of Monte Carlo simulation variance reduction techniques finds the option price.(5) Based on the simulation of two examples we compare of traditional real estate options pricing methods and the pricing methods in which the interest rates subjected to the CIR model. This paper also evaluates the two methods.This paper concluded that the real estate option pricing shortcomings and looking forward to the future real estate options pricing research.