On the Evaluation of Compound Options

Michael J. P. Selby and Stewart D. Hodges
Additional contact information
Michael J. P. Selby: Morgan Grenfell Securities Holdings Ltd., P.O. Box 479, 20 Finsbury Circus, London, EC2M 7BB, United Kingdom
Stewart D. Hodges: School of Industrial and Business Studies, Warwick University, Warwick, United Kingdom

Management Science, 1987, vol. 33, issue 3, 347-355

Abstract: Compound option valuation formulae give rise to the summation of a series of multinormal distribution functions. This paper presents an identity on sums of nested multinormal distributions of arbitrary dimension. We show that this identity generalizes some well-known low order identities for the multinormal distribution. We present three applications of the new identity to contingent claims valuation problems. The first and second applications show that by reducing significantly the number of integrals to be evaluated, faster and more accurate algorithms can be developed for implementing the Geske-Johnson American put valuation formula and the Roll-Geske-Whaley American call formula; the third gives new economic insights into the valuation of disaggregated coupon bonds.

Keywords: American call; American put; computational efficiency; contingent claims; coupon bonds; identity; multinormal; nested (search for similar items in EconPapers)
Date: 1987
References: Add references at CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.33.3.347 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:33:y:1987:i:3:p:347-355

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().