Article ID: | iaor19941693 |
Country: | United States |
Volume: | 39 |
Issue: | 10 |
Start Page Number: | 1202 |
End Page Number: | 1213 |
Publication Date: | Oct 1993 |
Journal: | Management Science |
Authors: | Ritchken Peter, Sankarasubramanian L., Vijh Anand M. |
Keywords: | values, finance & banking |
This article values option contracts based on the average price realized over a finite time horizon. Such contracts are of importance to traders who periodically transact in spot markets and who require protection from adverse moves in their total accrued costs realized over their trading horizons. Explicit valuation models for pricing a variety of path dependent contracts based on geometric and arithmetic averages are developed. The early exercise features of American contracts are investigated, and it is shown that this feature has significant value.