REAL OPTIONS DEVELOPEMENT

Real options developement

Real Options Developement

While there is widespread agreement that the value of a mortgage contract subject to prepayment but not default risk should be given by an expectation of the present value of the cash ?ow, the devil is in the details. A wide variety of approaches have been considered, most of which are commonly classi?ed into one of two categories. One kind of approach has been variously called a reduced form approach, an exogenous approach, an empirical approach, and an econometric approach (Deng, 1997).

The basic idea is to build a stochastic model for interest rates and ...