THE GENERALIZATION OF THE GESKE-FORMULA FOR COMPOUND OPTIONS TO STOCHASTIC INTEREST-RATES IS NOT TRIVIAL - A NOTE

This note refers to the paper by Geman et al. [9], in which an extensi on of the Geske-formula for compound options to the case of stochastic interest rates is proposed. We show that such an extension is not pos sible in general. However, we point out modifications of Geske's origi nal problem in which closed formulas can still be obtained under stoch astic interest rates. In particular we consider the case of an option on a future-style option. Moreover, we sketch a numerical solution to Geske's original problem when interest rates are random.