On the Use of Numeraires in Option pricing
AbstractIn this paper we discuss the significant computational simplification that occurs when option pricing is approached through the change of numeraire technique. The original impetus was a recently published paper (Hoang, Powell, Shi 1999) on endowment options; in the present paper we extend these results to the case of stochastic interest rates. We also discuss four additional option pricing problems within the framework of a change of numeraire: 1. Pricing savings plans which incorporate a choice of linkage. 2. Pricing convertible bonds. 3. Pricing employee stock ownership plans 4. Pricing options where the strike price is in a currency different from the stock price.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 484.
Length: 25 pages
Date of creation: 03 Jan 2002
Date of revision:
Publication status: Published in Journal of Derivatives, 2002, pages 43-58.
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More information through EDIRC
Numeraire; option; convertible bond;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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