The Pricing of Marked-to-Market Contingent Claims in a No-Arbitrage Economy
AUSTRALIAN J. OF MANAGEMENT
Posted: 4 Jul 1997
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: Suggested Citation