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The Pricing of Index Options When the Underlying Assets All Follow a Lognormal Diffusion
Robert Brooks University of Alabama - Department of Economics, Finance and Legal Studies Jon Corson University of Alabama - Department of Mathematics J. Donal Wales affiliation not provided to SSRN ADVANCES IN FUTURES AND OPTIONS RESEARCH, Volume 7, 1994 Abstract: 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 Classifications: G13 Accepted Paper SeriesDate posted: July 18, 2001 ; Last revised: July 18, 2001Suggested CitationContact Information
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