Contingent Premium Options

Posted: 15 Mar 2001

Abstract

This article describes the valuation, hedging and applications of contingent premium options (CPOs). We derive closed-form formulas for path independent and path dependent CPOs that address most cases of practical importance. The resulting hedge ratios show that when it is not possible to hedge these options statically, hedging CPOs may become problematic, especially when the options approach maturity. We also discuss how to structure more specific CPOs, such as money-back and pay-later options. For an investor with a strong view on the price of the underlying asset, these types of options may be an attractive alternative to standard options.

Keywords: Derivatives, Exotic Options

Suggested Citation

Kat, Harry M., Contingent Premium Options. Journal of Derivatives, Vol. 1, No. 4, Summer 1994; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=257128

Harry M. Kat (Contact Author)

Independent

No Address Available

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