The Use of Power Numeraires in Option Pricing

11 Pages Posted: 22 Feb 2016 Last revised: 3 Nov 2016

See all articles by Mark S. Joshi

Mark S. Joshi

University of Melbourne - Centre for Actuarial Studies (deceased)

Date Written: February 21, 2016

Abstract

Power numeraires are defined. They are applied to the Black-Scholes model and the drift of the stock is derived. It is also shown how to use them to derive formulas for power options with barriers. A reinterpretation of contour-shifting in the context of characteristic function pricing is given. It is shown how to use power numeraires to improve the convergence of the COS method and numerical results are presented.

Keywords: numeraire, option pricing, COS method

Suggested Citation

Joshi, Mark, The Use of Power Numeraires in Option Pricing (February 21, 2016). Available at SSRN: https://ssrn.com/abstract=2735944 or http://dx.doi.org/10.2139/ssrn.2735944

Mark Joshi (Contact Author)

University of Melbourne - Centre for Actuarial Studies (deceased) ( email )

Melbourne, 3010
Australia

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