Valuation of Complex Financial Instruments via Basic Components

Joseph K Cheung and Richard Chung

Review of Quantitative Finance and Accounting, 1996, vol. 7, issue 2, 163-76

Abstract: This article presents a graphical approach to measuring financial instruments. It observes that the payoff contingencies of a large number of single-payoff financial instruments can be reduced to a piecewise-linear cash flow, which can be replicated with a handful of basic building blocks. Four such building blocks are identified, and they all relate to the concept of options. To demonstrate, this method is used to value several financial instruments: truncated standard call options, truncated standard put options, truncated binary call options, and hybrid foreign-currency put options. Copyright 1996 by Kluwer Academic Publishers

Date: 1996
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