A valuation formula for multi-asset, multi-period binaries in a Black--Scholes economy

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. doi:10.1017/S1446181109000285