In this paper, the authors develop a model for valuing debt options which takes into account the changing characteristics of the underlying bond by assuming that the standard deviation of return is proportional to the bond's duration. The resulting model uses the bond price as the single state variable and thus preserves much of the simplicity and robustness of the Black-Scholes approach. The paper provides comparisons between option prices computed using this model and those using the Black-Scholes and Brennan-Schwartz models. Copyright 1987 by American Finance Association.
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Article provided by American Finance Association in its journal Journal of Finance.
Volume (Year): 42 (1987) Issue (Month): 5 (December) Pages: 1113-28 Download reference. The following formats are available: HTML,
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