Changes of Numeraire for Pricing Futures, Forwards and Options

Posted: 25 Oct 1999

See all articles by Mark D. Schroder

Mark D. Schroder

Michigan State University - The Eli Broad Graduate School of Management

Abstract

A change of numeraire argument is used to derive a general option parity, or equivalence, result relating American call and put prices, and to obtain new expressions for futures and forward prices. The general parity result unifies and extends a number of existing results. The new futures and forward pricing formulas are often simpler to compute in multifactor models than existing alternatives. We also extend previous work by deriving a general formula relating exchange options to ordinary call options. A number of applications to diffusion models, including stochastic volatility, stochastic interest rate and stochastic dividend rate models, and jump-diffusion models are examined.

JEL Classification: G13

Suggested Citation

Schroder, Mark D., Changes of Numeraire for Pricing Futures, Forwards and Options. Review of Financial Studies, Vol. 12, Iss. 5. Available at SSRN: https://ssrn.com/abstract=184682

Mark D. Schroder (Contact Author)

Michigan State University - The Eli Broad Graduate School of Management ( email )

323 Eppley Center
East Lansing, MI 48824-1121
United States
517-432-0622 (Phone)
517-432-1080 (Fax)

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