《discrete amer option valuation stochastic rate》.pdfVIP

Discrete-Time Valuation of American Options with Stochastic Interest Rates Kaushik I. Amin and James N. Bodurtha, Jr. University of Michigan We develop an arbitrage-free discrete time model to price American-style claims for which domes- tic term structure risk, foreign term structure r i s k , a n d c u r r e n c y r i s k a r e i m p o r t a n t . T h i s model combines a discrete version of the Heath, Jarrow, and Morton (1992) term structure model with the binomial model of Cox, Ross, and Rubin- stein (1979). It converges (weakly) to the con- tinuous time models in Amin and Jarrow (1991, 1992). The general model is “path dependent” and can be implemented with arbitrary volatil- ity functions to value claims with maturity up to five years. The model is illustrated with applica- tions to long-dated American currency warrants and a cross-rate swap from the quanto class. We develop a discrete time arbitrage-free model to price American-exercise type securities that are der- ivatives of the term structures and currency exchange rate of two countries. Our discrete time model con- This article was formerly titled “Stochastic Interest Rates and the Ameri- can Exercise Feature: With an Application to International Money Market Contingent Claims.” For g