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A VALUATION FORMULA FOR MULTI-ASSET, MULTI-PERIOD BINARIES IN A BLACK–SCHOLES ECONOMY

Part of: Applications

Published online by Cambridge University Press:  04 December 2009

MAX SKIPPER  and
PETER BUCHEN
MAX SKIPPER
Affiliation:
School of Mathematics and Statistics, University of Sydney, Australia (email: [email protected])
PETER BUCHEN*
Affiliation:
Finance Discipline, Faculty of Business and Economics, University of Sydney, Australia (email: [email protected])
*
✉For correspondence; e-mail: [email protected]
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Abstract

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We present a new valuation formula for a generic, multi-period binary option in a multi-asset Black–Scholes economy. The payoff of this so-called M-binary is the most general possible, subject to the condition that a simple analytic expression exists for the present value. Portfolios of M-binaries can be used to statically replicate many European exotics for which there exist closed-form Black–Scholes prices.

Keywords

option pricingbinary optionsBlack–Scholes model

MSC classification

Secondary: 62P05: Applications to actuarial sciences and financial mathematics
Type
Research Article
Information
The ANZIAM Journal , Volume 50 , Issue 4 , April 2009 , pp. 475 - 485
Copyright
Copyright © Australian Mathematical Society 2009

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