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The Pricing of Marked†to†Market Contingent Claims in a No†Arbitrage Economy

Author

Listed:
  • Stephen E. Satchell

    (Trinity College, Trinity Street, Cambridge CB2 1TQ, UK.)

  • Richard C. Stapleton

    (The Management School, Lancaster University, Bailrigg, Lancaster, LA1 4YW, UK.)

  • Marti G. Subrahmanyam

    (Stern School of Business, New York University, Salomon Center, 40th West Fourth Street, New York NY 10012–1118, USA; E†mail: msubrahm@stern.nyu.edu)

Abstract

This paper assumes that the underlying asset prices are lognormally distributed, and derives necessary and sufficient conditions for the valuation of options using a Black†Scholes type methodology. It is shown that the price of a futures†style, marked†to†market option is given by Black's for Mula if the pricing kernel is lognormally distributed. Assuming that this condition is fulfilled, it is then shown that the Black†Scholes for Mula prices a spot†settled contingent claim, if the interest†rate accumulation factor is lognormally distributed. Otherwise, the Black†Scholes for Mula holds if the product of the pricing kernel and the interest†rate accumulation factor is lognormally distributed.

Suggested Citation

  • Stephen E. Satchell & Richard C. Stapleton & Marti G. Subrahmanyam, 1997. "The Pricing of Marked†to†Market Contingent Claims in a No†Arbitrage Economy," Australian Journal of Management, Australian School of Business, vol. 22(1), pages 1-20, June.
    • Handle: RePEc:sae:ausman:v:22:y:1997:i:1:p:1-20
    DOI: 10.1177/031289629702200101
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    References listed on IDEAS

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    1. Ho, T. S. & Stapleton, Richard C. & Subrahmanyam, Marti G., 1997. "The valuation of American options on bonds1," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1487-1513, December.

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