| Abstract: | The standard method for valuing a European option on a bond portfolio is developed by Jamshidian. He shows that under certain circumstances the payoff from a bond option can be expressed as a portfolio of payoffs on discount bond options, allowing the option to be valued as a portfolio of options. A limitation of this approach is that it cannot be applied to non‐Markovian interest rate processes. This paper develops a method for the valuation of a European option on a bond portfolio that can be applied to both Markovian and non‐Markovian interest rate processes. |
