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Pricing Contingent Claims under Interest Rate and Asset Price Risk
Author(s) -
KISHIMOTO NAOKI
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb04379.x
Subject(s) - interest rate , valuation (finance) , bond , convertible bond , rendleman–bartter model , economics , interest rate risk , rational pricing , bond valuation , financial economics , capital asset pricing model , stock (firearms) , actuarial science , monetary economics , finance , mechanical engineering , engineering
This paper presents a general framework for pricing contingent claims under interest rate and asset price uncertainty. The framework extends Ho and Lee's (1986) valuation framework by allowing not only future interest rates but also future asset prices to depend on the current term structure of interest rates. The approach is shown to provide risk‐neutral valuation relationships that are consistent with the initial term structure of interest rates and can be applied to valuation of a broad class of assets including stock options, convertible bonds, and junk bonds.