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The Direct Approach to Debt Option Pricing

  • K. Sandmann
  • Sandmann, K.

We review the continuous--time literature on the so-- called direct approach to bond option pricing. Going back to Ball and Torous (1983), this approach models bond price processes directly (i.e. without reference to interest rates or state variable processes) and applies methods that Black and Scholes (1973) and Merton (1973) had originally developed for stock options. We describe the principal modelling problems of the direct approach and compare in detail the solutions proposed in the literature. (Completely revised version march 1995)

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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 212.

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Date of creation: Mar 1995
Date of revision:
Handle: RePEc:bon:bonsfb:212
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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  1. Stoll, Hans R, 1969. "The Relationship between Put and Call Option Prices," Journal of Finance, American Finance Association, vol. 24(5), pages 801-24, December.
  2. Andrew W. Lo, . "Maximum Likelihood Estimation of Generalized Ito Processes with Discretely Sampled Data," Rodney L. White Center for Financial Research Working Papers 15-86, Wharton School Rodney L. White Center for Financial Research.
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