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Changes of Numeraire for Pricing Futures, Forwards, and Options

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  • Schroder, Mark

Abstract

A change of numeraire argument is used to derive a general option parity, or equivalence, result relating American call and put prices, and to obtain new expressions for futures and forward prices. The general parity result unifies and extends a number of existing results. The new futures and forward pricing formulas are often simpler to compute in multifactor models than existing alternatives. We also extend previous work by deriving a general formula relating exchange options to ordinary call options. A number of applications to diffusion models, including stochastic volatility, stochastic interest rate, and stochastic dividend rate models, and jump-diffusion models are examined. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Schroder, Mark, 1999. "Changes of Numeraire for Pricing Futures, Forwards, and Options," The Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1143-1163.
    • Handle: RePEc:oup:rfinst:v:12:y:1999:i:5:p:1143-63
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