Lecture_11 - 11 Options on Bonds This chapter studies the...

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1 11 Options on Bonds This chapter studies the arbitrage-free pricing of various types of options on bonds. Two types of structures are considered: distribution independent and distribution dependent. Distribution independent methods are those that do not depend on a particular evolution for the term structure of interest rates, while distribution dependent structures do. Distribution independent models generate very general results, often not specific enough to generate exact pricing and hedging descriptions. Usually, only pricing inequalities and bounds on synthetic constructions can be obtained. Hence, the need for distribution dependent models.
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