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- Title
Time-Dependent Variance and the Pricing of Bond Options.
- Authors
SCHAEFER, STEPHEN M.; SCHWARTZ, EDUARDO S.
- Abstract
In this paper, we develop a model for valuing debt options that takes into account the changing characteristics of the underlying bond by assuming that the standard deviation of return is proportional to the bond's duration. The resulting model uses the bond price as the single state variable and thus preserves much of the simplicity and robustness of the Black-Scholes approach. The paper provides comparisons between option prices computed using this model and those using the Black-Scholes and Brennan and Schwartz models.
- Subjects
OPTIONS (Finance); BOND prices; VARIANCES; INVESTMENT management; PRICING; DEBT; RATE of return; STANDARD deviations; TIME &; economic reactions; HEDGING (Finance); BOND market; MARKET volatility
- Publication
Journal of Finance (Wiley-Blackwell), 1987, Vol 42, Issue 5, p1113
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1987.tb04356.x