The influence of a stochastic interest rate on the n-fold compound option
Faculty of Applied Economics
Antwerpen :UA, 2003
Research paper / Faculty of Applied Economics ; 2003:10
University of Antwerp
We reintroduced the idea of an n-fold compound option as a generalization of Geskes (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., we will use the requirement of simple interest rates over a fixed finite period to be log-normal distributed, instead of the continuously compounded interest rates. With these assumptions, closed-form solutions are determined for the n-fold compound call options written on zero-coupon bonds.