(), Tomas Björk
() and Zvi Wiener
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.
25 pages, January 3, 2002
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