Suppose that a = 0:05 and σ = 0:015 in the Hull-White model with the initial term structure being flat at 6% with semiannual compounding.
Calculate the price of a 2.1-year European call option on a bond that will mature in 3 years.
Suppose that the bond pays a coupon of 5% per annum semiannually. The principal of the bond is 100 and the strike price of the option is 99. The strike price is the cash price (not the quoted price) that will be paid for the bond.