Convex Upper and Lower Bounds for Present Value Functions
Applied Stochastic Models in Business and Industry, Vol. 17, pp. 149-164, 2001
17 Pages Posted: 1 Mar 2006
In this paper we present an efficient methodology for approximating the distribution function of the net present value of a series of cash-flows, when the discounting is presented by a stochastic differential equation as in the Vasicek model and in the Ho-Lee model. Upper and lower bounds in convexity order are obtained. The high accuracy of the method is illustrated for cash-flows for which no analytical results are available.
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