https://scholars.lib.ntu.edu.tw/handle/123456789/414518
Title: | Pricing American options on foreign assets in a stochastic interest rate economy | Authors: | Chung S.-L. | Issue Date: | 2002 | Journal Volume: | 37 | Journal Issue: | 4 | Start page/Pages: | 667-692 | Source: | Journal of Financial and Quantitative Analysis | Abstract: | This paper values American options on foreign assets in a stochastic interest rate economy using a two-point Geske and Johnson (1984) technique. The method requires the valuation of just two options: a European option and a twice-exercisable option. I first derive the risk-neutral distributions of asset prices under two forward risk-adjusted measures. Closed-form solutions for European options on foreign assets are then obtained by applying these risk-neutral distributions. This article also provides analytic solutions for pricing twice-exercisable options that are at most two-dimensional even though the valuation problem involves four risk factors at two exercise dates. I report the results of numerical evaluations of American option values using my method and show how they vary with the interest rate parameters. I also verify the accuracy of the proposed method by comparing with the benchmark values obtained from the least-square method of Longstaff and Schwartz (2001). |
URI: | https://scholars.lib.ntu.edu.tw/handle/123456789/414518 | ISSN: | 00221090 | DOI: | 10.2307/3595016 |
Appears in Collections: | 財務金融學系 |
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