On the Expected Payoff and True Probability of Exercise of European Options

Posted: 6 Mar 2008

See all articles by Mark B. Shackleton

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance

Rafal M. Wojakowski

University of Surrey; Lancaster University - Management School

Abstract

The continuous-time formula for expected payoff to holding an option, which nests several major pricing tools, is derived. It is shown also that under current market conditions the true exercise probability, N(d4), lies halfway between the two more familiar terms: N(d1) and N(d2).

Keywords: Rate of return on option, Actual probability, Change of numeraire, True probability of exercise, Put call parity

JEL Classification: G12, G13

Suggested Citation

Shackleton, Mark B. and Wojakowski, Rafal M., On the Expected Payoff and True Probability of Exercise of European Options. Applied Economics Letters, Vol. 8, No. 4, 2001, Available at SSRN: https://ssrn.com/abstract=1102137

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
44 1524 594131 (Phone)
44 1524 847321 (Fax)

Rafal M. Wojakowski (Contact Author)

University of Surrey ( email )

Faculty of Business, Economics and Law
The Surrey Business School
Guildford, Surrey GU2 7XH
United Kingdom
+44 1483 683477 (Phone)

HOME PAGE: http://www.surrey.ac.uk/sbs/people/rafal_wojakowski/index.htm

Lancaster University - Management School ( email )

Lancaster, LA1 4YX
United Kingdom
+44 (1524) 593630 (Phone)
(01524) 847321 (Fax)

HOME PAGE: http://www.lums.lancs.ac.uk/profiles/rafal-wojakowski/

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