In this paper, we propose an alternative approach for pricing and hedging non-standard American options. In principle, the proposed approach applies to any kind of American-style contract for which the payoff function has a Markovian representation in the state space. Specifically, we obtain an...

Exact closed-form valuation equations for traded derivative securities are rare. Numerical approximation, most commonly with Binomial and Trinomial lattice models, gives exact valuation in the limit, but convergence is non-monotonic and often slow, due to 'distribution error' and 'truncation...

In this paper we investigate models of the term structure where the factors are interest rates. As an example, we derive a no-arbitrage model of the term structure in which any two futures (as opposed to forward) rates act as factors. The term structure shifts and tilts as the factor rates vary....

In this paper, we derive an equilibrium in which some investors buy call/put options on the market portfolio while others sell them. Since investors are assumed to have similar risk-averse preferences, the demand for these contracts is not explained by differences in the shape of utility...

In many markets, the term structure of interest rates implied by coupon Treasury bonds provides a key input for pricing and hedging interest rate-sensitive securities. Previous studies in the Japanese market, however, suggest that the prices of the Japanese Government Bonds (JGB's) were...

This paper examines the convexity bias introduced by pricing interest rate swaps off the Eurocurrency futures curve and the market's adjustment of this bias in prices over time. The convexity bias arises because of the difference between a futures contract and a forward contract on interest...

We build a no-arbitrage model of the term structure of interest rates using two stochastic factors, the short-term interest rate and the premium of the futures rate over the short-term interest rate. The model provides and extension of the lognormal interest rate model of Black and Karasinski...

We derive general properties of two-factor models of the term structure of interest rates and, in particular, the process for futures prices and rates. Then, as a special case, we derive a no-arbitrage model of the term structure in which any two futures rates act as factors. The term structure...