The Pricing of Index Options When the Underlying Assets All Follow a Lognormal Diffusion

Posted: 18 Jul 2001  

Robert Brooks

University of Alabama - Department of Economics, Finance and Legal Studies

Jon Corson

University of Alabama - Department of Mathematics

J. Donal Wales

affiliation not provided to SSRN

Abstract

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

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

Robert E. Brooks (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-8987 (Phone)
205-348-0590 (Fax)

HOME PAGE: http://www.frmhelp.com

Jon Corson

University of Alabama - Department of Mathematics ( email )

P. O. Box 870350
333C Gordon Palmer
Tuscaloosa, AL 35487-0350
United States
205-348-1965 (Phone)

J. Donal Wales

affiliation not provided to SSRN

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