Pricing American Interest Rate Options in a Heath-Jarrow-Morton Framework Using Method of Lines
Carl Chiarella and
Nadima El-Hassan ()
No 12, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney
Abstract:
We consider the pricing of American bond options in a Heath-Jarrow-Morton framework in which the forward rate volatility is a function of time to maturity and the instantaneous spot rate of interest. We have shown in Chiarella and El-Hassan (1996) that the resulting pricing partial differential operators are two dimensional in the spatial variables. In this paper we investigate an efficientnumerical method to solve there partial differential equations for American option prices and the corresponding free exercise surface. We consider in particular the method of lines which other investigators (eg Carr and Faguet (1994) and Van der Hoek and Meyer (1997)) have found to be efficient for American option pricing when there is one spatial variable. In extending this method for the two dimensional case, we solve the pricing equation by discretising the time variable and one state varialbe and using the spot rate of interest as a continuous variable. We compare our method with the lattice method of Li, Ritchken and Sankarasubramanian (1995).
Pages: 19 pages
Date: 1999-08-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)
Downloads: (external link)
http://www.qfrc.uts.edu.au/research/research_papers/rp12.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden (http://www.qfrc.uts.edu.au/research/research_papers/rp12.pdf [301 Moved Permanently]--> http://www.uts.edu.au/node/51831 [301 Moved Permanently]--> https://www.uts.edu.au/node/51831)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:12
Access Statistics for this paper
More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Duncan Ford ().