Valuation of long-term hybrid equity-interest rate options

During the last decades the financial world has witnessed an enormous growth in the trading of derivatives. Not only did the volumes increase massively, the complexity of some of the traded products truly went through the roof: as a consequence the so-called complex 'exotic' derivatives market shifted from being a strange and rare category (the word 'exotic' says it all) to a multi-billion industry that currently forms a crucial part of the growth strategy of many investment banks and insurance companies. Often these products are developed by financial institutions to reduce the financial risks of their clients; however they can also be used to create highly speculative positions which then can result in large profits, or big losses: the most recent example probably being the loss of +- 5 billion euros that was reported by the French bank Société Générale as consequence of a highly speculative position in futures contracts which was created by a (fraudulous) trader.