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Fixed Income Securities, 4th Edition
book

Fixed Income Securities, 4th Edition

by Bruce Tuckman, Angel Serrat
September 2022
Beginner content levelBeginner
560 pages
17h 36m
English
Wiley
Content preview from Fixed Income Securities, 4th Edition

APPENDIX TO CHAPTER 16Fixed Income Options

A16.1 THEORETICAL FOUNDATIONS FOR APPLYING BLACK‐SCHOLES‐MERTON (BSM) TO SELECTED FIXED INCOME OPTIONS

The justification for applying BSM in each of the cases of the text takes the following form:

  1. Given the functional form of a probability distribution (e.g., normal, lognormal), there exist parameters of that distribution such that upper V 0, the arbitrage‐free price of any asset today, is given by, where upper N Subscript t is the price at time t of an asset chosen as the numeraire; upper V Subscript t is value at time t of an asset being priced today, including reinvested cash flows; and upper E Subscript t Baseline left-bracket dot right-bracket gives expectations as of time t under the appropriately parameterized probability distribution. Equation  ...
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