A Frequency Distribution Approach to Valuing Mortgage Commitment Risk

E.H. Neave and S. Slavinsky (Canada)


Derivatives, Mortgage commitment options, frequencydistribution


This paper finds exact solutions for both European and American mortgage commitment options. We use a path bundling approach based on a frequency distribution that can be found by analytic methods. The frequency distribution can be used for immediate valuation of European options, and for recursive, exact valuation of the corresponding American options. Our approach is computationally efficient and very much faster than those of competing solution methods.

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