() and Joel Reneby
Jan Ericsson: McGill University, Postal: Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, Quebec, Canada H3A 1G5,
Joel Reneby: Dept. of Finance, Stockholm School of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden
Abstract: This paper contributes in two ways. First it extends the Geske (1979) compound option pricing model to the case where the underlying call is a down-and-out claim. Second it provides an internally consistent frame-work for valuing options on general corporate securities. Numerical results suggest that the detailed characteristics of the underlying capital structure (such as coupons, principal and maturities) may substantially influence the pricing of options.
38 pages, First version: November 1996. Revised: September 2002. Earlier revisions: February 1, 2002, February 7, 2002, May 1, 2000, May 1, 2000, May 2000, May 2000.
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