Scandinavian Working Papers in Economics

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

No 484: On the Use of Numeraires in Option pricing

Simon Benninga (), Tomas Björk () and Zvi Wiener ()
Additional contact information
Simon Benninga: Faculty of Management, Tel Aviv University, Postal: Israel
Tomas Björk: Dept. of Finance, Stockholm School of Economics, Postal: Sweden
Zvi Wiener: School of Business, Hebrew University of Jerusalem, Postal: Israel

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

JEL-codes: G12; G13

25 pages, January 3, 2002

Note: submitted

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Published as
Simon Benninga, 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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