Tid: 13 november 2000 kl 1515-1600

Plats : Seminarierummet 3733, Institutionen för matematik, KTH, Lindstedts väg 25, plan 7. Karta!

Föredragshållare: Otto Francke .

Titel: The impact of default risk when pricing American bond options using a Jarrow-Turnbull model. (Examensarbete)

Sammanfattning: The purpose of this thesis is to study the effect of default risk when pricing American bond options using an approach proposed by Robert A. Jarrow and Stuart M. Turnbull. The Jarrow-Turnbull approach incorporates default risk into an interest rate term structure model using yield spreads on corporate debt.

As case study, we price American bond options on bonds subject to default risk using the Jarrow-Turnbull approach and then compare them to the price of bond options where the underlying bonds are default free. The risky bonds which we discuss are bonds issued by German banks of different credit ratings and the assumed risk free bonds are German government bonds. It turns out that the differences in prices are significant. For American call options on bonds with low credit rating the price differs by up to 13 % of the notional. It is therefore concluded that default risk has great impact when pricing American bond options on corporate bonds.

This study together with Per WirsÚn's, ``The Impact of Default Risk when Pricing Bermudan Bond Options Using the Jarrow-Turnbull Approach'', was performed for Arthur Andersen as part of a project on the effect of default risk when pricing financial instruments.

Full text of master thesis.

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