Posted: 18 Jul 2001
In this paper, we present an index option pricing equation that is theoretically superior to prior models. Specially, we develop an analytic index option pricing equation assuming each security underlying the index follows geometric Brownian motion. We compare our model to the standard index option pricing model based on the Black and Scholes formula and find the difference to be significant.
JEL Classification: G13
Suggested Citation: Suggested Citation
Brooks, Robert and Corson, Jon and Wales, J. Donal, The Pricing of Index Options When the Underlying Assets All Follow a Lognormal Diffusion. ADVANCES IN FUTURES AND OPTIONS RESEARCH, Volume 7, 1994. Available at SSRN: https://ssrn.com/abstract=5735