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Analytical solutions for the pricing of american bond and yield options


Chesney, Marc; Gibson, Rajna; Elliott, Robert J (1993). Analytical solutions for the pricing of american bond and yield options. Mathematical Finance, 3(3):277-294.

Abstract

In this paper we use the Cox, Ingersoll, and Ross (1985b) single-factor, term structure model and extend it to the pricing of American default-free bond puts. We provide a quasi-analytical formula for these option prices based on recently established mathematical results for Bessel bridges, coupled with the optimal stopping time method. We extend our results to another interest rate contingent claim and provide a quasi-analytical solution for American yield option prices which illustrates the flexibility of our framework.

Abstract

In this paper we use the Cox, Ingersoll, and Ross (1985b) single-factor, term structure model and extend it to the pricing of American default-free bond puts. We provide a quasi-analytical formula for these option prices based on recently established mathematical results for Bessel bridges, coupled with the optimal stopping time method. We extend our results to another interest rate contingent claim and provide a quasi-analytical solution for American yield option prices which illustrates the flexibility of our framework.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords: American bond option; Bessel processes; early exercise premium; free boundary approach; optimal stopping; term structure of interest rates; yield option
Date:1993
Deposited On:03 Jan 2012 17:21
Last Modified:05 Apr 2016 15:19
Publisher:Wiley-Blackwell
ISSN:0960-1627
Publisher DOI:https://doi.org/10.1111/j.1467-9965.1993.tb00045.x
Other Identification Number:merlin-id:4687

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