The Direct Approach to Debt Option Pricing

Rady, Sven (1994): The Direct Approach to Debt Option Pricing. In: Review of Futures Markets, Vol. 13, No. 2: pp. 461-515

Abstract

We review the continuous{time literature on the so{called direct approach to bond option pricing. Going back to Ball and Torous (1983), this approach models bond price processes directly (i.e. without reference to interest rates or state variable processes) and applies methods that Black and Scholes (1973) and Merton (1973) had originally developed for stock options. We describe the principal modelling problems of the direct approach and compare in detail the solutions proposed in the literature

• Item Type: Journal article
• Keywords: Arbitrage, Debt Options, Option Pricing
• Faculties: Economics > Chairs > Chair of Dynamic Economic Theory (closed); Economics
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics