The Pricing of Index Options When the Underlying Assets All Follow a Lognormal Diffusion
University of Alabama - Department of Economics, Finance and Legal Studies
University of Alabama - Department of Mathematics
J. Donal Wales
affiliation not provided to SSRN
ADVANCES IN FUTURES AND OPTIONS RESEARCH, Volume 7, 1994
In this paper, we present an index option pricing equation that is theoretically superior to prior models. Specially, we develop an analytic index option pricing equation assuming each security underlying the index follows geometric Brownian motion. We compare our model to the standard index option pricing model based on the Black and Scholes formula and find the difference to be significant.
JEL Classification: G13Accepted Paper Series
Date posted: July 18, 2001
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