Closed-form solutions for European and Digital calls in the Hull and White stochastic volatility model and their relation to locally R-minimizing and Delta hedges

This paper derives an analytic expression for the distribution of the average volatility in the stochastic volatility model of Hull and White. This result answers a longstanding question, posed by Hull and White (Journal of Finance 42, 1987), whether such an analytic form exists. Our findings are applied to obtain closed-form solutions for European and Digital call option prices. The paper also provides an explicit solution for the Delta hedge of a European call. Moreover, it is proved that the Delta hedge under the minimal martingale measure coincides with the locally R-minimizing hedge in the model considered here.