THE VALUE OF AN OPTION BASED ON AN AVERAGE SECURITY VALUE

A. G. Z. Kemna and Ton Vorst ()

No 272350, Econometric Institute Archives from Erasmus University Rotterdam

Abstract: In this paper we shall discuss a financial option of which the payoff depends on the average value of the underlying security over some final time interval. After explaining what an option is about we will derive a partial differential equation for the option which is different from the partial differential equation of a simple European call option. From this we will get an expectation formula for the option value. We will give an economical as well as a mathematical argument for this expectation formula.

Keywords: Agricultural and Food Policy; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 17
Date: 1986
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Persistent link: https://EconPapers.repec.org/RePEc:ags:eureia:272350

DOI: 10.22004/ag.econ.272350

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