Discrete-Time Valuation of American Options with Stochastic Interest Rates
Author | : Kaushik I. Amin |
Publisher | : |
Total Pages | : |
Release | : 2012 |
ISBN-10 | : OCLC:1290778822 |
ISBN-13 | : |
Rating | : 4/5 (22 Downloads) |
Download or read book Discrete-Time Valuation of American Options with Stochastic Interest Rates written by Kaushik I. Amin and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop an arbitrage-free discrete time model to price American-style claims for which domestic term structurerisk, foreign term structure risk and currency risk are important. This model combines a discrete version of the Heath, Jarrow, Morton (1992) term structure model with the binomial model of Cox, Ross, and Rubinstein (1979). It converges (weakly) to the continuous time models in Amin and Jarrow (1991, 1992). The general model is quot;path dependentquot; and can be implemented with arbitrary volatility functions to value claims with maturity up to five years. The model is illustrated with applications to long-dated American currency warrants and a cross-rate swap from the quanto class.