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A variational approach for pricing options and corporate bonds

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  • Jean-Charles Rochet

    (GREMAQ and IDEI, UniversitÊ des Sciences Sociales, Manufacture des Tabacs, 21, AllÊe de Brienne, Batiment, F-31000 Toulouse, FRANCE)

  • Jean-Paul DÊcamps

    (GREMAQ, UniversitÊ des Sciences Sociales, Manufacture des Tabacs, 21, AllÊe de Brienne, Batiment, F-31000 Toulouse, FRANCE)

Abstract

We show that option prices can always be obtained as the values of simple optimization problems. This easy remark has two consequences: sensitivity analysis is simplified (by applying the envelope theorem) and numerical procedures are improved. We give two examples of applications: options on coupon bonds and corporate bonds.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 9 (1997)
Issue (Month): 3 ()
Pages: 557-569

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Handle: RePEc:spr:joecth:v:9:y:1997:i:3:p:557-569

Note: Received: February 2, 1995; Revised version May 14, 1996
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Cited by:
  1. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742 Elsevier.
  2. Decamps, Jean-Paul & Faure-Grimaud, Antoine, 2002. "Excessive continuation and dynamic agency costs of debt," European Economic Review, Elsevier, vol. 46(9), pages 1623-1644, October.
  3. Duffie, Darrell, 2005. "Credit risk modeling with affine processes," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2751-2802, November.

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