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An Extension of the Black-Scholes and Margrabe Formulas to a Multiple Risk Economy

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DOI: 10.4236/am.2011.24053    5,615 Downloads   10,815 Views   Citations

ABSTRACT

We consider an economic model with a deterministic money market account and a finite set of basic economic risks. The real-world prices of the risks are represented by continuous time stochastic processes satisfying a stochastic differential equation of diffusion type. For the simple class of log-normally distributed instantaneous rates of return, we construct an explicit state-price deflator. Since this includes the Black-Scholes and the Vasicek (Ornstein-Uhlenbeck) return models, the considered deflator is called Black-Scholes- Vasicek deflator. Besides a new elementary proof of the Black-Scholes and Margrabe option pricing formulas a validation of these in a multiple risk economy is achieved.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

W. Hürlimann, "An Extension of the Black-Scholes and Margrabe Formulas to a Multiple Risk Economy," Applied Mathematics, Vol. 2 No. 4, 2011, pp. 427-432. doi: 10.4236/am.2011.24053.

References

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