SSE/EFI Working Paper Series in Economics and Finance
On the Use of Numeraires in Option pricing
(), 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.
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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