COMPOUND AND EXCHANGE OPTIONS

IN THE AFFINE TERM STRUCTURE MODEL

SCAILLET, O. *

* Universite catholique de Louvain

 

Abstract

We present explicit formulae allowing us to price compound and exchange options in the framework of the affine term structure model. The various proposed options deal with discount bonds, coupon bonds and yields. A probabilistic approach is adopted in order to find closed-form pricing formulae. We also give some numerical examples of their use in credit loans.

Keywords : term structure, compound option, exchange option, affine model.

JEL : E43, G13.