The Pricing of Market-to-Market Contingent Claims in a No-Arbitrage Economy

29 Pages Posted: 11 Nov 2008

See all articles by Stephen E. Satchell

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Date Written: February 1997

Abstract

This paper assumes that the underlying asset prices are lognormally distributed and drives necessary and sufficient conditions for the valuation of options using a Black-Scholes type methodology. It is shown that the price of a futures-style, market-to-market option is given by Black s formula if the pricing kernel is lognormally distributed. Assuming that this condition is fulfilled, it is then shown that the Black-Scholes formula prices a spot-settled contingent claim, if the interest-rate accumulation factor is lognormally distributed. Otherwise, the Black-Scholes formula holds if the product of the pricing kernel and the interest-rate accumulation factor is lognormally distributed.

Suggested Citation

Satchell, Stephen E. and Stapleton, Richard C. and Subrahmanyam, Marti G., The Pricing of Market-to-Market Contingent Claims in a No-Arbitrage Economy (February 1997). NYU Working Paper No. FIN-96-037. Available at SSRN: https://ssrn.com/abstract=1298302

Stephen E. Satchell (Contact Author)

University of Cambridge - Faculty of Economics and Politics ( email )

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HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance ( email )

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Glasgow G4 0LN
United Kingdom
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+44 1524 846874 (Fax)

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
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New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

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