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The Value Of An Option Based On An Average Security Value

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  • Kemna, A. G. Z.
  • Vorst, A. C. F.

Abstract

In this paper we shall discuss a financial option of which the payoff depends on the average value of the underlying security over some final time interval. After explaining what an option is about we will derive a partial differential equation for the option which is different from the partial differential equation of a simple European call option. From this we will get an expectation formula for the option value. We will give an economical as well as a mathematical argument for this expectation formula.

Suggested Citation

  • Kemna, A. G. Z. & Vorst, A. C. F., 1986. "The Value Of An Option Based On An Average Security Value," Econometric Institute Archives 272350, Erasmus University Rotterdam.
    • Handle: RePEc:ags:eureia:272350
    DOI: 10.22004/ag.econ.272350
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    References listed on IDEAS

    as
    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    3. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
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