Scale invariance and contingent claim pricing II: Path-dependent contingent claims
AbstractThis article is the second one in a series on the use of scaling invariance in finance. In the first paper, we introduced a new formalism for the pricing of derivative securities, which focusses on tradable objects only, and which completely avoids the use of martingale techniques. In this article we show the use of the formalism in the context of path-dependent options. We derive compact and intuitive formulae for the prices of a whole range of well known options such as arithmetic and geometric average options, barriers, rebates and lookback options. Some of these have not appeared in the literature before. For example, we find rather elegant formulae for double barrier options with moving barriers, continuous dividends and all possible configurations of the barriers. The strength of the formalism reveals itself in the ease with which these prices can be derived. This allowed us to pinpoint some mistakes regarding geometric mean options, which frequently appear in the literature. Furthermore, symmetries such as put-call transformations appear in a natural way within the framework.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Finance with number 9907003.
Length: 20 pages
Date of creation: 16 Jul 1999
Date of revision:
Note: Type of Document - PDF; prepared on NT/Latex; to print on PDF printer; pages: 20 . See also http://www.cwi.nl/~jiri for postscript version
Contact details of provider:
Web page: http://18.104.22.168
contingent claim pricing; scale-invariance; homogeneity; partial differential equation;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jiri Hoogland & Dimitri Neumann, 1999. "Scale invariance and contingent claim pricing," Finance 9907002, EconWPA.
- Kemna, A. G. Z. & Vorst, A. C. F., 1990. "A pricing method for options based on average asset values," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 113-129, March.
Cited by:reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.