Abstract
There are many options which are based on interest rate sensitive assets. For example, debt options and currency options are best priced when a stochastic bond price process is included. However, not all stochastic bond price processes are feasible for use in pricing options by standard arbitrage techniques. This work draws on the results of Harrison and Kreps ( J. Econ. Theory 20 (1979), 381–408) and relates them to pricing in the presence of stochastic bond price processes. Examples of feasible and infeasible bond price processes are given.
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