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The Direct Approach to Debt Option Pricing

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  • Rady, Sven

Abstract

We review the continuous{time literature on the so{called direct approach to bond option pricing. Going back to Ball and Torous (1983), this approach models bond price processes directly (i.e. without reference to interest rates or state variable processes) and applies methods that Black and Scholes (1973) and Merton (1973) had originally developed for stock options. We describe the principal modelling problems of the direct approach and compare in detail the solutions proposed in the literature

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File URL: http://epub.ub.uni-muenchen.de/3404/1/1.pdf
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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 3404.

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Date of creation: 1994
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Publication status: Published in Review of Futures Markets 2 13(1994): pp. 461-515
Handle: RePEc:lmu:muenar:3404

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Postal: Ludwigstr. 28, 80539 Munich, Germany
Phone: +49-(0)89-2180-3405
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Web page: http://www.vwl.uni-muenchen.de
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Related research

Keywords: Arbitrage; Debt Options; Option Pricing;

References

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  1. Lo, Andrew W., 1988. "Maximum Likelihood Estimation of Generalized Itô Processes with Discretely Sampled Data," Econometric Theory, Cambridge University Press, vol. 4(02), pages 231-247, August.
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Citations

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Cited by:
  1. Christian Zuehlsdorff, 1999. "The Pricing of Derivatives on Assets with Quadratic Volatility," Discussion Paper Serie B 451, University of Bonn, Germany.
  2. Christian Zühlsdorff, 2002. "The Pricing of Derivatives on Assets with Quadratic Volatility," Bonn Econ Discussion Papers bgse5_2002, University of Bonn, Germany.
  3. Schlögl, Erik & Daniel Sommer, 1994. "On Short Rate Processes and Their Implications for Term Structure Movements," Discussion Paper Serie B 293, University of Bonn, Germany.
  4. Ioannides, Michalis, 2003. "A comparison of yield curve estimation techniques using UK data," Journal of Banking & Finance, Elsevier, vol. 27(1), pages 1-26, January.
  5. Peter Carr & Travis Fisher & Johannes Ruf, 2012. "Why are quadratic normal volatility models analytically tractable?," Papers 1202.6187, arXiv.org, revised Mar 2013.
  6. Miltersen, Kristian R & Sandmann, Klaus & Sondermann, Dieter, 1997. " Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates," Journal of Finance, American Finance Association, vol. 52(1), pages 409-30, March.
  7. D. Sondermann & K. Miltersen, 1994. "Closed Form Term Structure Derivatives in a Heath-Jarrow- Morton Model with Log-Normal Annually Compounded Interest Rates," Discussion Paper Serie B 285, University of Bonn, Germany.
  8. Musiela, Marek & Dieter Sondermann, 1993. "Different Dynamical Specifications of the Term Structure of Interest Rates and their Implications," Discussion Paper Serie B 260, University of Bonn, Germany.
  9. Christian Zuhlsdorff, 2001. "The pricing of derivatives on assets with quadratic volatility," Applied Mathematical Finance, Taylor & Francis Journals, vol. 8(4), pages 235-262.
  10. D. Sondermann & Sandmann, K., 1994. "On the Stability of Log-Normal Interest Rate Models and the Pricing of Eurodollar Futures," Discussion Paper Serie B 263, University of Bonn, Germany.

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