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Changes of Numeraire for Pricing Futures, Forwards, and Options

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  • Schroder, Mark
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    Abstract

    A change of numeraire argument is used to derive a general option parity, or equivalence, result relating American call and put prices, and to obtain new expressions for futures and forward prices. The general parity result unifies and extends a number of existing results. The new futures and forward pricing formulas are often simpler to compute in multifactor models than existing alternatives. We also extend previous work by deriving a general formula relating exchange options to ordinary call options. A number of applications to diffusion models, including stochastic volatility, stochastic interest rate, and stochastic dividend rate models, and jump-diffusion models are examined. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 12 (1999)
    Issue (Month): 5 ()
    Pages: 1143-63

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    Handle: RePEc:oup:rfinst:v:12:y:1999:i:5:p:1143-63

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    Cited by:
    1. Cai, Ning & Sun, Lihua, 2014. "Valuation of stock loans with jump risk," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 213-241.
    2. Tehranchi, Michael R., 2009. "Symmetric martingales and symmetric smiles," Stochastic Processes and their Applications, Elsevier, vol. 119(10), pages 3785-3797, October.
    3. Fajardo, J. & Mordeckiy, E., 2003. "Pricing Derivatives on Two Lévy-driven Stocks," Finance Lab Working Papers flwp_56, Finance Lab, Insper Instituto de Ensino e Pesquisa.
    4. José Fajardo & Ernesto Mordecki, 2009. "Skewness Premium with Lévy Processes," CREATES Research Papers 2009-10, School of Economics and Management, University of Aarhus.
    5. José Fajardo & Ernesto Mordecki, 2005. "Duality and Derivative Pricing with Time-Changed Lévy Processes," IBMEC RJ Economics Discussion Papers 2005-12, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    6. Lin, Yueh-Neng, 2013. "VIX option pricing and CBOE VIX Term Structure: A new methodology for volatility derivatives valuation," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4432-4446.
    7. Anna Battauz & Marzia De Donno & Alessandro Sbuelz, 2013. "Real Options and American Derivatives: the Double Continuation Region," Working Papers 499, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    8. Ruas, João Pedro & Dias, José Carlos & Vidal Nunes, João Pedro, 2013. "Pricing and static hedging of American-style options under the jump to default extended CEV model," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4059-4072.
    9. José Fajardo & Ernesto Mordecki, 2005. "Duality and Derivative Pricing with Lévy Processes," IBMEC RJ Economics Discussion Papers 2005-01, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    10. Detemple, Jérôme & Emmerling, Thomas, 2009. "American chooser options," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 128-153, January.
    11. Ernst Eberlein & Wolfgang Kluge & Antonis Papapantoleon, 2006. "Symmetries In Lévy Term Structure Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(06), pages 967-986.
    12. Medvedev, Alexey & Scaillet, Olivier, 2010. "Pricing American options under stochastic volatility and stochastic interest rates," Journal of Financial Economics, Elsevier, vol. 98(1), pages 145-159, October.

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