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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 484:
On the Use of Numeraires in Option pricing

Simon Benninga (), Tomas Björk () and Zvi Wiener ()

Abstract: In 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.

Keywords: Numeraire; option; convertible bond; (follow links to similar papers)

JEL-Codes: G12; G13; (follow links to similar papers)

25 pages, January 3, 2002

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This paper is published as:
Benninga, Simon, Tomas Björk and Zvi Wiener, (2002), 'On the Use of Numeraires in Option pricing', Journal of Derivatives, Vol. 10, No. 2, pages 43-58



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