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The Valuation of American Options with Stochastic Interest Rates: A Generalization of the Geske-Johnson Technique

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  • Ho, T S
  • Stapleton, Richard C
  • Subrahmanyam, Marti G
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    Abstract

    The Geske-Johnson approach provides an efficient and intuitively appealing technique for the valuation and hedging of American-style contingent claims. Here, the authors generalize their approach to a stochastic interest rate economy. The method is implemented using options exercisable on one of a finite number of dates. The authors illustrate how the value of an American-style option increases with interest rate volatility. The magnitude of this effect depends on the extent to which the option is in the money, the volatilities of the underlying asset and the interest rates, as well as the correlation between them. Copyright 1997 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 52 (1997)
    Issue (Month): 2 (June)
    Pages: 827-40

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    Handle: RePEc:bla:jfinan:v:52:y:1997:i:2:p:827-40

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    Cited by:
    1. Manuel Moreno & Javier R. Navas, 2001. "On the robustness of least-squares Monte Carlo (LSM) for pricing American derivatives," Economics Working Papers 543, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Bert Menkveld & Ton Vorst, 1998. "A Pricing Model for American Options with Stochastic Interest Rates," Tinbergen Institute Discussion Papers 98-028/2, Tinbergen Institute.
    3. Carl Chiarella & Andrew Ziogas, 2002. "Evaluation of American Strangles," Computing in Economics and Finance 2002 28, Society for Computational Economics.
    4. B. Gao J. Huang, . "The Valuation of American Barrier Options Using the Decomposition Technique," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-002, New York University, Leonard N. Stern School of Business-.

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