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A VALUATION FORMULA FOR MULTI-ASSET, MULTI-PERIOD BINARIES IN A BLACK–SCHOLES ECONOMY
Published online by Cambridge University Press: 04 December 2009
Abstract
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.
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- Copyright © Australian Mathematical Society 2009