Pricing dynamic binary variables and their derivatives
AbstractMany important assets or business ventures have cash flows that are not derivatives of a market security but are nevertheless dependent on some variable that is correlated with market prices. This includes many real option projects. This paper presents a methodology using a binary framework for pricing such assets by projection onto the market space. Under certain conditions, the result has the property that, given this price process, no risk-averse investor would choose to invest in this asset either long or short.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Quantitative Finance.
Volume (Year): 12 (2012)
Issue (Month): 3 (April)
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Web page: http://www.tandfonline.com/RQUF20
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