Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 137: Stock Options as Barrier Contingent Claims

Jan Ericsson () and Joel Reneby ()
Additional contact information
Jan Ericsson: McGill University, Postal: Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, Quebec, Canada H3A 1G5,
Joel Reneby: Dept. of Finance, Stockholm School of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden

Abstract: This paper contributes in two ways. First it extends the Geske (1979) compound option pricing model to the case where the underlying call is a down-and-out claim. Second it provides an internally consistent frame-work for valuing options on general corporate securities. Numerical results suggest that the detailed characteristics of the underlying capital structure (such as coupons, principal and maturities) may substantially influence the pricing of options.

Keywords: Compound barrier contingent claims; option pricing

JEL-codes: G13

38 pages, First version: November 1996. Revised: September 2002. Earlier revisions: February 1, 2002, February 7, 2002, May 1, 2000, May 1, 2000, May 2000, May 2000.

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