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Curved Option Payoffs

Author

Listed:
  • Garry de Jager
  • Joseph Winsen

Abstract

An increasing number of securities and corporate cashflows have been identified partly or wholly as options with the familiar pieswise linear payoff function. And it has been recognised non-linear payoffs can in principle be approximated by a portfolio of (piecewise linear) options. This paper considers the valuation of nonlinear payoffs directly by defining a "curved option" payoff, illustrating the approach for a European call option on a non-dividend paying stock and highlighting the advantages for traders in running a book of such options.

Suggested Citation

  • Garry de Jager & Joseph Winsen, 1992. "Curved Option Payoffs," Working Paper Series 19, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:wpaper:19
    as

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    File URL: http://www.finance.uts.edu.au/research/wpapers/wp19.pdf
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    References listed on IDEAS

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    1. Goldman, M Barry & Sosin, Howard B & Gatto, Mary Ann, 1979. "Path Dependent Options: "Buy at the Low, Sell at the High"," Journal of Finance, American Finance Association, vol. 34(5), pages 1111-1127, December.
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    4. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
    5. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
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