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A VALUATION FORMULA FOR MULTI-ASSET, MULTI-PERIOD BINARIES IN A BLACK–SCHOLES ECONOMY

Published online by Cambridge University Press:  04 December 2009

MAX SKIPPER
Affiliation:
School of Mathematics and Statistics, University of Sydney, Australia (email: M.Skipper@maths.usyd.edu.au)
PETER BUCHEN*
Affiliation:
Finance Discipline, Faculty of Business and Economics, University of Sydney, Australia (email: P.Buchen@econ.usyd.edu.au)
*
For correspondence; e-mail: P.Buchen@econ.usyd.edu.au
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Abstract

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We present a new valuation formula for a generic, multi-period binary option in a multi-asset Black–Scholes economy. The payoff of this so-called M-binary is the most general possible, subject to the condition that a simple analytic expression exists for the present value. Portfolios of M-binaries can be used to statically replicate many European exotics for which there exist closed-form Black–Scholes prices.

Type
Research Article
Copyright
Copyright © Australian Mathematical Society 2009

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