Article1991

A Simple Approach to Interest-Rate Option Pricing

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

Abstract

A simple introduction to contingent claim valuation of risky assets in a discrete time, stochastic interest-rate economy is provided. Taking the term structure of interest rates as exogenous, closed-form solutions are derived for European options written on (i) Treasury bills, (ii) interest-rate forward contracts, (iii) interest-rate futures contracts, (iv) Treasury bonds, (v) interest-rate caps, (vi) stock options, (vii) equity forward contracts, (viii) equity futures contracts, (ix) Eurodollar liabilities, and (x) foreign exchange contracts.

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References

1973Theory of Rational Option Pricing 2005Theory of rational option pricing 1979Option pricing: A simplified approach 1992Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation 1976The pricing of commodity contracts 1976The Valuation of Uncertain Income Streams and the Pricing of Options 1986Term Structure Movements and Pricing Interest Rate Contingent Claims 1979The valuation of compound options

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2010Pricing the term structure of inflation risk premia: Theory and evidence from TIPS 1995Discrete-Time Valuation of American Options with Stochastic Interest Rates 1994Reverse Engineering the Yield Curve 1999Pricing Options under Stochastic Interest Rates: A New Approach 1996An Alternative Valuation Model for Contingent Claims 1994A survey of stochastic continuous time models of the term structure of interest rates

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