Pricing LYONs Under Stochastic Interest Rates
Javier F. Navas
Pablo de Olavide University
Revista de Economía Financiera, Vol. 7, 2005
In this study, one of the simplifying assumptions of the McConnell and Schwartz (1986) LYON pricing model is relaxed. We present a valuation model that incorporates stochastic interest rates. LYON prices are computed with the modified explicit finite differences method of Hull and White (1990) and with the Least - Squares Monte Carlo technique. For the Waste Management issue, we find that the value of the LYON is very sensitive to the market price of interest rate risk and somehow sensitive to the correlation coefficient between interest rates and stock returns.
Number of Pages in PDF File: 21
Keywords: convertible bonds, option pricing, stochastic interest rates
JEL Classification: C63, E43, G13Accepted Paper Series
Date posted: November 20, 2007
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