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Valuation Of Compound Option When The Underlying Asset Is Non-Tradable

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  • YU-HONG LIU

    ()
    (Graduate Institute of Finance and Banking, National Cheng Kung University, Tainan, Taiwan)

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    Abstract

    After Geske (1979), compound options — options on options — have been employed in many fields in which real options are applied. The formula for a compound option is convenient to use in real project investment, but it has one drawback — the assets that underlie the compound options are usually non-tradable. This article addresses this issue and proposes two new compound option pricing formulae to overcome this drawback.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 13 (2010)
    Issue (Month): 03 ()
    Pages: 441-458

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    Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:03:p:441-458

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    Related research

    Keywords: Compound option; non-tradable asset; incomplete market; utility indifference pricing;

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