On the Use of Numeraires in Option Pricing

Posted: 20 Jan 2003

See all articles by Simon Benninga

Simon Benninga

Tel Aviv University - Faculty of Management

Tomas Bjork

Stockholm School of Economics - Swedish House of Finance

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Multiple version iconThere are 2 versions of this paper

Abstract

Significant computational simplification is achieved when option pricing is approached through the change of numeraire technique. By pricing an asset in terms of another traded asset (the numeraire), this technique reduces the number of sources of risk that need to be accounted for. The technique is useful in pricing complicated derivatives.

This article discusses the underlying theory of the numeraire technique, and illustrates it with five pricing problems: pricing savings plans that offer a choice of interest rates; pricing convertible bonds; pricing employee stock ownership plans; pricing options whose strike price is in a currency different from the stock price; and pricing options whose strike price is correlated with the short-term interest rate.

Keywords: options, numeraire

JEL Classification: G12, G13

Suggested Citation

Benninga, Simon and Bjork, Tomas and Wiener, Zvi, On the Use of Numeraires in Option Pricing. Journal of Derivatives, December 2002. Available at SSRN: https://ssrn.com/abstract=347560

Simon Benninga (Contact Author)

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)

Tomas Bjork

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

Drottninggatan 98
111 60 Stockholm
Sweden

Zvi Wiener

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

Register to save articles to
your library

Register

Paper statistics

Abstract Views
944
PlumX Metrics