1. Analytical Pricing of European Bond Options within One-Factor Quadratic Term Structure Models
- Author
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Franck Moraux, Grégoire Leblon, Centre de recherche en économie et management (CREM), Université de Caen Normandie (UNICAEN), Normandie Université (NU)-Normandie Université (NU)-Université de Rennes (UR)-Centre National de la Recherche Scientifique (CNRS), Institut de Gestion de Rennes - Institut d'Administration des Entreprises - Rennes (IGR-IAE Rennes), Université de Rennes (UR), Centre National de la Recherche Scientifique (CNRS)-Université de Rennes 1 (UR1), Université de Rennes (UNIV-RENNES)-Université de Rennes (UNIV-RENNES)-Université de Caen Normandie (UNICAEN), Normandie Université (NU)-Normandie Université (NU), Université de Rennes 1 (UR1), Université de Rennes (UNIV-RENNES)-Université de Rennes (UNIV-RENNES), Normandie Université (NU)-Normandie Université (NU)-Université de Rennes 1 (UR1), Université de Rennes (UNIV-RENNES)-Université de Rennes (UNIV-RENNES)-Centre National de la Recherche Scientifique (CNRS), and Bernardini, Sophie
- Subjects
bond option ,Economics and Econometrics ,State variable ,analytical pricing ,Bond option ,media_common.quotation_subject ,Quadratic equation ,quadratic term structure models ,0502 economics and business ,Economics ,050207 economics ,[SHS.ECO] Humanities and Social Sciences/Economics and Finance ,media_common ,Vasicek model ,050208 finance ,Actuarial science ,Bond ,05 social sciences ,european bond options ,[SHS.ECO]Humanities and Social Sciences/Economics and Finance ,Interest rate ,Bond valuation ,[SHS.GESTION]Humanities and Social Sciences/Business administration ,Coupon ,Mathematical economics ,Finance - Abstract
International audience; Jamshidian developed a model for pricing bond options within a Vasicek one-factor framework, with the very useful property that it allows an option on a coupon bond to be decomposed into a set of options on the individual coupons. In the Vasicek framework, the “Jamshidian trick” produces yields to maturity on the coupons that are linear functions of the underlying state variable. But it has not been clear whether this approach could extend to more complicated interest rate processes. In this article, Leblon and Moraux show how to extend the Jamshidian technique to quadratic interest rate processes and use it to derive analytic formulas for European call options on coupon bonds. Finally, they verify that the required conditions appear to hold in the real world.
- Published
- 2017
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