Option pricing under jump diffusion model (Q6580270)

In this paper, the authors consider a continuous-time model where the asset price process follows a jump-diffusion and the interest rate is stochastic and follows a jump-diffusion with CIR-type dynamics. The jumps are generated by a compound Poisson process. The asset price process is assumed to be independent of the stochastic interest rate. In this framework, the authors consider the problem of pricing a European call option written on the asset. As a preliminary result, an explicit formula is derived for zero-coupon bond prices. The main result of the paper is a semi-explicit formula for the call option price, expressed as an infinite series. As a further development, the authors consider basket options in the same modeling setup.