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| Author: | Selby, M. J. P. Hodges, S. D. |
| Title: | On the evaluation of compound options. |
| Journal: | Management Science
1987 : MAR, VOL. 33:3, p. 347-355 |
| Index terms: | STOCK OPTIONS ASSET VALUATION |
| Language: | eng |
| Abstract: | An identity on sums of nested multinormal distribution functions of arbitrary dimension is presented. A new general identity on nested multinormal distributions, which both encompasses and generalizes earlier results, is proven. It is shown how the identity improves the computational efficiency of the compound option based American option valuation formulae by reducing the number of integrals to be evaluated. Thus the equation with the fewest integral approximations will be the least expensive computationally. The new identity has given deeper economic insight into Geske's bond valuation formula. |
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