The Pricing of Marked-to-Market Contingent Claims in a No-Arbitrage Economy

AUSTRALIAN J. OF MANAGEMENT

Posted: 4 Jul 1997

See all articles by Stephen E. Satchell

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Abstract

This paper assumes that the underlying asset prices are lognormally distributed, and derives necessary and sufficient conditions for the valuation of options using a Black-Scholes type methodology. It is shown that the price of a futures-style, marked-to-market option is given by Black's formula if the pricing kernel is lognormally distributed. Assuming that this condition is fulfilled, it is then shown that the Black-Scholes formula prices a spot- settled contingent claim, if the interest-rate accumulation factor is lognormally distributed. Otherwise, the Black- Scholes formula holds if the product of the pricing kernel and the interest-rate accumulation factor is lognormally distributed.

JEL Classification: G13, G12

Suggested Citation

Satchell, Stephen E. and Stapleton, Richard C. and Subrahmanyam, Marti G., The Pricing of Marked-to-Market Contingent Claims in a No-Arbitrage Economy. AUSTRALIAN J. OF MANAGEMENT. Available at SSRN: https://ssrn.com/abstract=8399

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom
+44 1524 381 172 (Phone)
+44 1524 846874 (Fax)

Marti G. Subrahmanyam (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

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