The Direct Approach to Debt Option Pricing

Sven Rady

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: We review the continuous{time literature on the so{called direct approach to bond option pricing. Going back to Ball and Torous (1983), this approach models bond price processes directly (i.e. without reference to interest rates or state variable processes) and applies methods that Black and Scholes (1973) and Merton (1973) had originally developed for stock options. We describe the principal modelling problems of the direct approach and compare in detail the solutions proposed in the literature

Keywords: Arbitrage; Debt Options; Option Pricing (search for similar items in EconPapers)
Date: 1994
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Citations: View citations in EconPapers (6)

Published in Review of Futures Markets 2 13(1994): pp. 461-515

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