|
Two-Dimensional Risk-Neutral Valuation Relationships for the Pricing of Options
We price European-style options on assets whose probability distributions have two unknown parameters. We assume a pricing kernel which also has two unknown parameters. When certain conditions are met, a two-dimensional risk-neutral valuation relationship exists for the pricing of these options. Here, the relationship between the price of the option and that of the underlying asset and one other option on the asset, is the same as it would be under risk neutrality. In this model, the price of the underlying asset and that of one other option take the place of the unknown parameters. Examples of applications include: the pricing of options on assets with a generalized lognormal distribution, and the pricing of options on log-normally distributed assets when the pricing kernel has declining elasticity.
[download pdf]
|
|
