This paper presents new approximation formulae for European options in a local volatility model with stochastic interest rates. This is a companion paper to our work on perturbation methods for local volatility models [<italic>Int. J. Theor. Appl. Finance</italic>, 2010, <bold>13</bold>(4), 603--634] for the case of...

Because of its very general formulation, the local volatility model does not have an analytical solution for European options. In this article, we present a new methodology to derive closed form solutions for the price of any European options. The formula results from an asymptotic expansion,...