Abstract
This paper presents a jump extension to the CIR model of the short interest rate with exponential distribution jumps. We derive an approximated price of an American put option on a defaultable-free, zero-coupon bond using the two-GJ approach based on combining an European put option and a Bermudan option with two possible exercise dates. Closed-form solutions for both the European put option and the Bermudan option are obtained by using multivariate Fourier transforms and characteristic functions. The accuracy and efficiency of the approximation are examined using the least-square Monte Carlo simulation as the benchmarks. Finally several numerical examples illustrating the results have been presented and the prices have been compared to the corresponding prices for American option in the pure diffusion model.
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