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The Valuation of Options with Restrictions on Preferences and Distributions

✍ Scribed by António Câmara

Publisher
John Wiley and Sons
Year
2001
Tongue
English
Weight
231 KB
Volume
21
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

This article develops a discrete‐time, risk‐neutral valuation relation (RNVR) for the
pricing of contingent claims when preferences in the economy are characterized by decreasing absolute risk
aversion and the marginal distribution of the underlying is an inverse coshnormal. The RNVR is applied to obtain
closed‐form expressions for calls and puts written on nondividend‐paying stocks, futures
contracts, foreign currencies, and dividend‐paying stocks. Such pricing equations contain two parameters,
the threshold and rescale parameters, not contained in the Black–Scholes valuation equation.
Inverse‐coshnormal option values make the approach look interesting. © 2001 John Wiley & Sons,
Inc. Jrl Fut Mark 21:1091–1117, 2001

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