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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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  • THOMASSEN, Liesbeth & VAN WOUWE, Martine, "undated". "The influence of a stochastic interest rate on the n-fold compound option," Working Papers 2003010, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2003010

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    References listed on IDEAS

    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    2. 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.
    3. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    4. 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 409-430, March.
    5. THOMASSEN, Liesbeth & VAN WOUWE, Martine, "undated". "The n-fold compound option," Working Papers 2001041, University of Antwerp, Faculty of Applied Economics.
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    Cited by:

    1. Cassimon, D. & Engelen, P.J. & Thomassen, L. & Van Wouwe, M., 2007. "Closed-form valuation of American call options on stocks paying multiple dividends," Finance Research Letters, Elsevier, vol. 4(1), pages 33-48, March.

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    Financial; N-fold compound options; Log-normal interest rates;

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