The valuation of options on coupon bonds

We derive simple closed-form expressions for European options on coupon bonds using the general equilibrium term-structure framework of Cox, Ingersoll, and Ross The properties of these options are very different from those implied by the Black-Scholes model For example, bond call and put values can...

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Bibliographic Details
Published inJournal of banking & finance Vol. 17; no. 1; pp. 27 - 42
Main Author Longstaff, Francis A.
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.02.1993
Elsevier
North-Holland Pub. Co
Elsevier Sequoia S.A
SeriesJournal of Banking & Finance
Subjects
Bonds
Characteristics
Economic models
Implications
Interest rates
Put & call options
Stochastic models
Studies
Valuation
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Summary:We derive simple closed-form expressions for European options on coupon bonds using the general equilibrium term-structure framework of Cox, Ingersoll, and Ross The properties of these options are very different from those implied by the Black-Scholes model For example, bond call and put values can move in the same direction as the value of the underlying bond changes This has important implications for hedging interest-rate risk with bond options. Furthermore, bond option values can be decreasing functions of interest-rate volatility as well as their time to expiration We also examine the properties of American bond options
ISSN:0378-4266
1872-6372
DOI:10.1016/0378-4266(93)90078-R