A simple method for generalized sequential compound options pricing

Xiandong Wang and Jianmin He

Mathematical Social Sciences, 2017, vol. 87, issue C, 85-91

Abstract: This paper presents a new and simple method to derive the pricing formula for generalized sequential compound options (SCOs). Multi-fold generalized SCOs are defined as compound options on (compound) options, where the call/put property of each fold can be arbitrarily assigned. To obtain the analytic pricing formula for n-fold generalized SCOs, we prove and generalize a mathematical expectation related to multivariate normal variables, which are potentially very useful in pricing many types of option. Subsequently, with the help of the proven conclusions, the n-fold generalized SCOs pricing formulas for the diffusion model and the log-normal jump-diffusion model are derived. Finally, some possible computational methods for the calculation of SCOs price are presented.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:87:y:2017:i:c:p:85-91

DOI: 10.1016/j.mathsocsci.2017.03.001

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