The influence of a stochastic interest rate on the n-fold compound option
Faculty of Applied Economics
Faculty of Sciences. Mathematics and Computer Science
Theory and application of recent robust methods
International Conference on Robust Statistics (ICORS 2003), JUL 13-18, 2003, Antwerp, BELGIUM
, p. 343-353
University of Antwerp
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. (1997), we will use the requirement of simple interest rates over a fixed finite period to be log-normal distributed. With these assumptions, closed-form solutions are determined for the n-fold compound call options written on zero-coupon bonds. A numerical illustration of the application of robust methods to interest rates is discussed.