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Decomposition of the n-fold compound option

Author

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  • THOMASSEN, Liesbeth
  • VAN CASTEREN, Jan
  • VAN WOUWE, Martine

Abstract

In a previous paper by Thomassen and Van Wouwe [5] the notion of an n-fold compound option was introduced as a generalization of Geske’s compound option [3]. To compute such an n-fold numerically remains possible but tedious because most algorithms are not capable to compute multivariate normal CDF’s for higher dimensions (n >= 3). For that reason a proof to regard an n-fold as an (n-k)-fold on a k-fold is given and allows for example to decompose a 6-fold compound option into a 2-fold and a 4-fold.

Suggested Citation

  • THOMASSEN, Liesbeth & VAN CASTEREN, Jan & VAN WOUWE, Martine, 2002. "Decomposition of the n-fold compound option," Working Papers 2002040, University of Antwerp, Faculty of Business and Economics.
    • Handle: RePEc:ant:wpaper:2002040
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    References listed on IDEAS

    as
    1. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    2. Cassimon, D. & Engelen, P. J. & Thomassen, L. & Van Wouwe, M., 2004. "The valuation of a NDA using a 6-fold compound option," Research Policy, Elsevier, vol. 33(1), pages 41-51, January.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    4. THOMASSEN, Liesbeth & VAN WOUWE, Martine, "undated". "The n-fold compound option," Working Papers 2001041, University of Antwerp, Faculty of Business and Economics.
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    Cited by:

    1. Cassimon, D. & Engelen, P.J. & Thomassen, L. & Van Wouwe, M., 2007. "Closed-form valuation of American call options on stocks paying multiple dividends," Finance Research Letters, Elsevier, vol. 4(1), pages 33-48, March.
    2. Guglielmo D’Amico & Giovanni Villani, 2021. "Valuation of R&D compound option using Markov chain approach," Annals of Finance, Springer, vol. 17(3), pages 379-404, September.

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    Keywords

    Financial; N-fold compound options;

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