Exchange Options Under Jump-Diffusion Dynamics
Margrabe provides a pricing formula for an exchange option where the distributions of both stock prices are log-normal with correlated Wiener components. Merton has provided a formula for the price of a European call option on a single stock where the stock price process contains a continuous Poisson jump component, in addition to a continuous log-normally distributed component. We use Merton’s analysis to extend Margrabe’s results to the case of exchange options where both stock price processes also contain compound Poisson jump components. A Radon-Nikod´ym derivative process that induces the change of measure from the market measure to an equivalent martingale measure is introduced. The choice of parameters in the Radon-Nikod´ym derivative allows us to price the option under different financial-economic scenarios. We also consider American style exchange options and provide a probabilistic intepretation of the early exercise premium.
|Date of creation:||01 Oct 2008|
|Date of revision:|
|Publication status:||Published as: Cheang, G. H. L. and Chiarella, C., 2011, "Exchange Options Under Jump-Diffusion Dynamics", Applied Mathematical Finance, 18(3), 245-276.|
|Contact details of provider:|| Postal: PO Box 123, Broadway, NSW 2007, Australia|
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.qfrc.uts.edu.au/
More information through EDIRC
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.:
- Chandrasekhar Reddy Gukhal, 2001. "Analytical Valuation of American Options on Jump-Diffusion Processes," Mathematical Finance, Wiley Blackwell, vol. 11(1), pages 97-115.
- Mark Broadie & Jér�me Detemple, 1997. "The Valuation of American Options on Multiple Assets," Mathematical Finance, Wiley Blackwell, vol. 7(3), pages 241-286.
- David B. Colwell & Robert J. Elliott, 1993. "Discontinuous Asset Prices And Non-Attainable Contingent Claims," Mathematical Finance, Wiley Blackwell, vol. 3(3), pages 295-308.
- S. D. Jacka, 1991. "Optimal Stopping and the American Put," Mathematical Finance, Wiley Blackwell, vol. 1(2), pages 1-14.
- J. Michael Harrison & Stanley R. Pliska, 1981. "Martingales and Stochastic Integrals in the Theory of Continous Trading," Discussion Papers 454, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:235. See general 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: (Duncan Ford)
If references are entirely missing, you can add them using this form.