On the Expected Payoff and True Probability of Exercise of European Options
Posted: 6 Mar 2008
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: Suggested Citation