Pricing Onion Options : A Probabilistic Approach

As argued by Ebenfeld, Mayr and Topper (2002), Onion options may be decomposed into one-touch double barrier binary options (ODBs). Using this idea, these authors provide an arbitrage-free pricing formula for Onion options within the Black-Scholes framework. Their approach rests upon solving the underlying partial differential equation. In this paper, we take an alternative and more direct route: Based on a probabilistic approach, we compute the risk-neutral valuation formula for an ODB. Then, by inverting the decomposition of an Onion option, we are able to derive an alternative pricing formula for this type of an option.

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Date Issued:
08.10.2013
URN:
urn:nbn:de:hbz:464-20181002-144940-5
DOI:
10.5430/ijfr.v4n4p11
Language:
English
Type of Resource:
Text
Keywords:
onion options; one-touch double barrier binary options; double-notouch options; arbitrage-free pricing; Black-Scholes model
Collection:
E-Publications
Dewey Decimal Classification:
330 Economics
Subject categories of the Deutsche Nationalbibliografie:
330 Economics
Hosting institution:
Mercator School of Management - Faculty of Business Administration
Info on primary publication:
International Journal of Financial Research Vol. 4, No. 4; 2013, p 11 - 25; Online Published: October 8, 2013
funding:
The publication of this article was supported by the Publication Fund of the University of Duisburg-Essen.

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