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American option pricing in Gauss–Markov interest rate models

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  • Galluccio, Stefano

Abstract

In the context of Gaussian non-homogeneous interest-rate models, we study the problem of American bond option pricing. In particular, we show how to efficiently compute the exercise boundary in these models in order to decompose the price as a sum of a European option and an American premium. Generalizations to coupon-bearing bonds and jump-diffusion processes for the interest rates are also discussed.

Suggested Citation

  • Galluccio, Stefano, 1999. "American option pricing in Gauss–Markov interest rate models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 269(1), pages 61-71.
  • Handle: RePEc:eee:phsmap:v:269:y:1999:i:1:p:61-71
    DOI: 10.1016/S0378-4371(99)00080-1
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