State Price Density, Esscher Transforms, and Pricing Options on Stocks, Bonds, and Foreign Exchange Rates

Yong Yao

North American Actuarial Journal, 2001, vol. 5, issue 3, 104-117

Abstract: The state price density is modeled as an exponential function of the underlying state variables, and the Esscher transform is used to specify the forward-risk-adjusted measure. With the aid of state price densities, Esscher transforms, and characteristic functions, this paper provides a consistent framework for pricing options on stocks, interest rates, and foreign exchange rates. The framework discussed is quite general and is related to many popular models.

Date: 2001
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DOI: 10.1080/10920277.2001.10596002

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