Pricing Interest-Rate-Derivative Securities

1990-10-01articleReview of Financial Studies2,168 citationsclosed

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Stochastic processes and financial applications Financial Markets and Investment Strategies Risk Management in Financial Firms

Abstract

This article shows that the one-state-variable interest-rate models of Vasicek (1977) and Cox, Ingersoll, and Ross (1985b) can be extended so that they are consistent with both the current term structure of interest rates and either the current volatilities of all spot interest rates or the current volatilities of all forward interest rates. The extended Vasicek model is shown to be very tractable analytically. The article compares option prices obtained using the extended Vasicek model with those obtained using a number of other models.

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References

1973The Pricing of Options and Corporate Liabilities

1985A Theory of the Term Structure of Interest Rates

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2005Theory of rational option pricing

1977An equilibrium characterization of the term structure

1987The Pricing of Options on Assets with Stochastic Volatilities

1992Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation

1976The pricing of commodity contracts

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