An Analytical Approach to Merton's Rational Option Pricing Theory

Rocio Elizondo and Padilla Pablo

No 2008-03, Working Papers from Banco de México

Abstract: In the early 70's Merton developed a theory based on economic arguments to study the properties of option and warrant prices. The main tool in his proofs was the portafolio dominance principle. In the context where the prices of a contingent claim satisfies a partial differential equation we provide analytical proofs of Merton's rational option pricing theory. We use several versions of the maximum principle as well as the sliding and the moving planes methods to prove our results. Our approach enables us to extend the theory to nonlinear models.

JEL-codes: C02 G10 G11 (search for similar items in EconPapers)
Date: 2008-03
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Citations: View citations in EconPapers (1)

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