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Bond Option Valuation for Non‐Markovian Interest Rate Processes

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  • Joel R. Barber

Abstract

The standard method for valuing a European option on a bond portfolio is developed by Jamshidian. He shows that under certain circumstances the payoff from a bond option can be expressed as a portfolio of payoffs on discount bond options, allowing the option to be valued as a portfolio of options. A limitation of this approach is that it cannot be applied to non‐Markovian interest rate processes. This paper develops a method for the valuation of a European option on a bond portfolio that can be applied to both Markovian and non‐Markovian interest rate processes.

Suggested Citation

  • Joel R. Barber, 2005. "Bond Option Valuation for Non‐Markovian Interest Rate Processes," The Financial Review, Eastern Finance Association, vol. 40(4), pages 519-532, November.
    • Handle: RePEc:bla:finrev:v:40:y:2005:i:4:p:519-532
    DOI: 10.1111/j.1540-6288.2005.00122.x
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    References listed on IDEAS

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