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Pricing Contingent Claims under Interest Rate and Asset Price Risk

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  • NAOKI KISHIMOTO

Abstract

This paper presents a general framework for pricing contingent claims under interest rate and asset price uncertainty. The framework extends Ho and Lee's (1986) valuation framework by allowing not only future interest rates but also future asset prices to depend on the current term structure of interest rates. The approach is shown to provide risk‐neutral valuation relationships that are consistent with the initial term structure of interest rates and can be applied to valuation of a broad class of assets including stock options, convertible bonds, and junk bonds.

Suggested Citation

  • Naoki Kishimoto, 1989. "Pricing Contingent Claims under Interest Rate and Asset Price Risk," Journal of Finance, American Finance Association, vol. 44(3), pages 571-589, July.
    • Handle: RePEc:bla:jfinan:v:44:y:1989:i:3:p:571-589
    DOI: 10.1111/j.1540-6261.1989.tb04379.x
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    Cited by:

    1. Jimmy E. Hilliard & Adam L. Schwartz & Alan L. Tucker, 1996. "Bivariate Binomial Options Pricing With Generalized Interest Rate Processes," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(4), pages 585-602, December.
    2. Lesseig, Vance P. & Stock, Duane, 2000. "Impact of Correlation of Asset Value and Interest Rates upon Duration and Convexity of Risky Debt," Journal of Business Research, Elsevier, vol. 49(3), pages 289-301, September.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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