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The Condition of the Conditionality

Author

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  • Tumellano Sebehela

    (School of Construction Economics & Management, WITS University, Johannesburg, 2050, South Africa)

Abstract

The interdependence of options is common among compound options. Moreover, this interconnectedness is synonymous with probability theory-how a set of axioms are treated. The conditionality, where one option value is dependent on another option, has spilled over to option pricing, especially exchange options. However, it seems that no study has explored whether that simultaneous occurrence of two options is conditional or not. This study uses conditional approaches (Radon–Nikodým derivative and probability theory) to illustrate conditionality in an exchange option. Furthermore, hedging strategy is derived based on straddles. The results show that due to conditionality another exotic option, tri-conditional option (also known as triple option) is derived. The hedging of a triple option encompasses both dynamic and static techniques.

Suggested Citation

  • Tumellano Sebehela, 2021. "The Condition of the Conditionality," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 24(04), pages 1-39, December.
    • Handle: RePEc:wsi:rpbfmp:v:24:y:2021:i:04:n:s0219091521500272
    DOI: 10.1142/S0219091521500272
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    Keywords

    Conditionality; exchange option;

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