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

Posted: 18 Jul 2001

See all articles by Robert Brooks

Robert Brooks

Financial Risk Management LLC

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 E. and Corson, Jon and Wales, J. Donal, The Pricing of Index Options When the Underlying Assets All Follow a Lognormal Diffusion. Available at SSRN: https://ssrn.com/abstract=5735

Robert E. Brooks (Contact Author)

Financial Risk Management LLC ( email )

13157 Martin Road Spur
Northport, AL AL 35473
United States

HOME PAGE: http://www.robertebrooks.org

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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