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On the Use of Numeraires in Option Pricing

25 Pages Posted: 20 Jan 2002  

Tomas Bjork

Stockholm School of Economics - Swedish House of Finance

Simon Benninga

Tel Aviv University - Faculty of Management

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2001

Abstract

In this paper we discuss the significant computational simplification that occurs when option pricing is approached through the change of numeraire technique. The original impetus was a recently published paper on endowment options (Hoang, Powell, Shi 1999). We show that the HPS analysis can be simplified and extended by the use of numeraire techniques. We extend these results to the case of stochastic interest rates. We also discuss four additional option pricing problems within the framework of a change of numeraire:

- Pricing savings plans which incorporate a choice of linkage.

- Pricing convertible bonds.

- Pricing employee stock ownership plans

- Pricing options where the strike price is in a currency different from the stock price.

Keywords: Options, Numeraire, Convertible Bonds, Employee Stock Options, Currency Options

JEL Classification: G12

Suggested Citation

Bjork, Tomas and Benninga, Simon and Wiener, Zvi, On the Use of Numeraires in Option Pricing (December 1, 2001). Available at SSRN: https://ssrn.com/abstract=297056 or http://dx.doi.org/10.2139/ssrn.297056

Tomas Bjork

Stockholm School of Economics - Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Simon Benninga

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
+972-3-640-6317 (Phone)
+972-2-673-4675 (Fax)

Zvi Wiener (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

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