Changes of Numeraire for Pricing Futures, Forwards and Options
Posted: 25 Oct 1999
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
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