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Forward-neutral valuation relationships for options on zero coupon bonds

Listed author(s):
  • António Câmara
  • Ana Câmara
Registered author(s):

    This paper extends the literature on Risk-Neutral Valuation Relationships (RNVRs) to derive valuation formulae for options on zero coupon bonds when interest rates are stochastic. We develop Forward-Neutral Valuation Relationships (FNVRs) for the transformed-bounded random walk class. Our transformed-bounded random walk family of forward bond price processes implies that (i) the prices of the zero coupon bonds are bounded below at zero and above at one, and (ii) negative continuously compounded interest rates are ruled out. FNVRs are frameworks for option pricing, where the forward prices of the options are martingales independent of the market prices of risk. We illustrate the generality and flexibility of our approach with models that yield several new closed-form solutions for call and put options on discount bonds.

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    Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

    Volume (Year): 12 (2012)
    Issue (Month): 8 (March)
    Pages: 1241-1252

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    Handle: RePEc:taf:quantf:v:12:y:2012:i:8:p:1241-1252
    DOI: 10.1080/14697688.2010.507212
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