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Pricing exotic options using the Wang transform

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  • Labuschagne, Coenraad C.A.
  • Offwood, Theresa M.
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    Abstract

    The Wang transform allows for a simple, yet intuitive approach to pricing options with underlying based on geometric Brownian motion. This paper shows how the approach by Hamada and Sherris can be used to price some exotic options. Examples showing the convergence of the Wang price to the Black–Scholes price for a Margrabe option, a geometric basket option and an asset-or-nothing option are given. We also take a look at the range of prices achievable using the Wang transform for these options.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1062940812000599
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    Bibliographic Info

    Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

    Volume (Year): 25 (2013)
    Issue (Month): C ()
    Pages: 139-150

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    Handle: RePEc:eee:ecofin:v:25:y:2013:i:c:p:139-150

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    Web page: http://www.elsevier.com/locate/inca/620163

    Related research

    Keywords: Wang transform; Exotic options; Geometric Brownian motion; Choquet pricing;

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    References

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    1. A. Chateauneuf & R. Kast & A. Lapied, 1996. "Choquet Pricing For Financial Markets With Frictions," Mathematical Finance, Wiley Blackwell, vol. 6(3), pages 323-330.
    2. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    3. Labuschagne, Coenraad C.A. & Offwood, Theresa M., 2010. "A note on the connection between the Esscher-Girsanov transform and the Wang transform," Insurance: Mathematics and Economics, Elsevier, vol. 47(3), pages 385-390, December.
    4. Mahmoud Hamada & Michael Sherris, 2003. "Contingent claim pricing using probability distortion operators: methods from insurance risk pricing and their relationship to financial theory," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(1), pages 19-47.
    5. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-86, March.
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    Cited by:
    1. Michael McAleer & Shawkat Hammoudeh, 2012. "Risk Management and Financial Derivatives:An Overview," KIER Working Papers 816, Kyoto University, Institute of Economic Research.

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