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A note on the valuation of compound options

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  • Fatma Lajeri‐Chaherli

Abstract

The value of a compound option, an option on an option, has been derived by Geske (1976) using Fourier integrals. This article presents two alternative proofs to derive the value of a compound option. One proof is based on the martingale approach, which provides a simple and powerful tool for valuing contingent claims. The second proof uses the expectation of a truncated bivariate normal variable. These proofs allow for an intuitive interpretation of the three elements constituting the value of a compound option. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1103–1115, 2002

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  • Fatma Lajeri‐Chaherli, 2002. "A note on the valuation of compound options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(11), pages 1103-1115, November.
    • Handle: RePEc:wly:jfutmk:v:22:y:2002:i:11:p:1103-1115
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    Cited by:

    1. Mr. Jorge A Chan-Lau & Mr. Andre O Santos, 2010. "Public Debt Sustainability and Management in a Compound Option Framework," IMF Working Papers 2010/002, International Monetary Fund.

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