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The influence of a stochastic interest rate on the n-fold compound option

  • THOMASSEN, Liesbeth
  • VAN WOUWE, Martine

We reintroduced the idea of an n-fold compound option as a generalization of Geske’s (2- fold) compound option in the same framework of constant interest rates. For the valuation of long-term financial agreements (life insurance products) this assumption is not always realistic. So that the stochastic modelling of the interest rates might be a better approach. According to Miltersen et al., we will use the requirement of simple interest rates over a fixed finite period to be log-normal distributed, instead of the continuously compounded interest rates. With these assumptions, closed-form solutions are determined for the n-fold compound call options written on zero-coupon bonds.

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Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2003010.

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Length: 15 pages
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Handle: RePEc:ant:wpaper:2003010
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