A Pricing Model for American Options with Gaussian Interest Rates

Albert Menkveld and Ton Vorst ()

Annals of Operations Research, 2000, vol. 100, issue 1, 226 pages

Abstract: In this paper we introduce a new methodology to price American put options under stochastic interest rates. We derive an analytic approximation that can be evaluated very fast and is fairly accurate. The method uses the so-called forward risk adjusted measure to derive analytic prices. We show that for American puts the correlation between the stock price and the interest rate has different influences on European option values and early exercise premiums. Copyright Kluwer Academic Publishers 2000

Keywords: American options; early exercise; change of numeraire; interest rates (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1023/A:1019275302878

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