Curved Option Payoffs

Garry de Jager and Joseph Winsen

No 19, Working Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: An increasing number of securities and corporate cashflows have been identified partly or wholly as options with the familiar pieswise linear payoff function. And it has been recognised non-linear payoffs can in principle be approximated by a portfolio of (piecewise linear) options. This paper considers the valuation of nonlinear payoffs directly by defining a "curved option" payoff, illustrating the approach for a European call option on a non-dividend paying stock and highlighting the advantages for traders in running a book of such options.

Pages: 29 pages
Date: 1992-07-01
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