In this paper, we propose a method to price collateralized debt obligations (CDO) within Merton's structural model on underlyings with a stochastic mean-reverting covariance dependence. There are two key elements in our development, first we reduce dimensionality and complexity using principal...

Ritchken and Trevor (1999) proposed a lattice approach for pricing American options under discrete time-varying volatility GARCH frameworks. Even though the lattice approach worked well for the pricing of the GARCH options, it was inappropriate when the option price was computed on the lattice...

In this paper we propose a computationally efficient implementation of general one factor short rate models with a trinomial tree. We improve the Hull–White’s procedure to calibrate the tree to bond prices by circumventing the forward rate induction and numerical root search algorithms. Our...

This paper develops methods for relating the prices of discrete- and continuous-time versions of path-dependent options sensitive to extremal values of the underlying asset, including lookback, barrier, and hindsight options. The relationships take the form of correction terms that can be...