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

Max Skipper, Peter Buchen

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

Keywords


option pricing; binary options; Black–Scholes model



DOI: http://dx.doi.org/10.21914/anziamj.v50i0.1292



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ANZIAM Journal, ISSN 1446-8735, copyright Australian Mathematical Society.