The valuation of compound options on jump-diffusions with time-dependent parameters

In a recent paper, Chandrasekhar ReddyGukhal (2004) derived analytical valuation formulas for compound options when the underlying asset follows a jump-diffusion process. The parameters (interest rate, volatility and dividend rate) in the model are constant. In reality, however, these parameters change with time. In this paper a generalization of compound options formulas on jump-diffusions is derived in the case of time-dependent parameters. Such a generalization seems to be more appropriate for the valuation of compound options.