The influence of a stochastic interest rate on the n-fold compound option

Liesbeth Thomassen and Martine van Wouwe ()

Working Papers from University of Antwerp, Faculty of Business and Economics

Abstract: We reintroduced the idea of an n-fold compound option as a generalization of Geske’s (2- fold) compound option in the same framework of constant interest rates. For the valuation of long-term financial agreements (life insurance products) this assumption is not always realistic. So that the stochastic modelling of the interest rates might be a better approach. According to Miltersen et al., we will use the requirement of simple interest rates over a fixed finite period to be log-normal distributed, instead of the continuously compounded interest rates. With these assumptions, closed-form solutions are determined for the n-fold compound call options written on zero-coupon bonds.

Keywords: Financial; N-fold compound options; Log-normal interest rates (search for similar items in EconPapers)
Pages: 15 pages
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ant:wpaper:2003010

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