Applied Bachelier Option Pricing: Where Both Assets Are Price Uncertain, and Option Asset Value

18 Pages Posted: 11 Mar 2020

Date Written: February 19, 2020

Abstract

This paper builds on Louis Bachelier model for option pricing work by the author. The focus is to generalise the option model for where both assets are price uncertain, adapting the bivariate normal to the model; the paper also works on defining the underlying asset values based on this model, in doing so proposes the option definition be revised to recognise as a contract to ‘complete’ a purchase or sale transaction. In applying the model to the underlying asset values the question on attributing the instability coefficient arises and a solution is proposed implying a revision within the pricing model for this purpose, also the necessary question of the appropriate rate is addressed.

Keywords: Bachelier, Options, Option Asset Value, Bivariate

JEL Classification: G

Suggested Citation

Thomson, Ian, Applied Bachelier Option Pricing: Where Both Assets Are Price Uncertain, and Option Asset Value (February 19, 2020). Available at SSRN: https://ssrn.com/abstract=3540718 or http://dx.doi.org/10.2139/ssrn.3540718

Ian Thomson (Contact Author)

University of St Joseph ( email )

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