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ANAYTICAL SOLUTIONS FOR THE PRICING OF AMERICAN BOND AND YIELD OPTIONS 1
Author(s) -
Chesney Marc,
Elliott Robert J.,
Gibson Rajna
Publication year - 1993
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.1993.tb00045.x
Subject(s) - bond , yield (engineering) , bond valuation , yield curve , embedded option , mathematical economics , short rate , flexibility (engineering) , economics , affine term structure model , optimal stopping , interest rate , convenience yield , mathematical finance , econometrics , financial economics , finance , physics , futures contract , spot contract , thermodynamics , management
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.