Publication:
A note on the valuation of compound options

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The value of a compound option, an option on an option, has been derived by Geske (1976) using Fourier integrals. This article presents two alternative proofs to derive the value of a compound option. One proof is based on the martingale approach, which provides a simple and powerful tool for valuing contingent claims, The second proof uses the expectation of a truncated bivariate normal variable. These proofs allow for an intuitive interpretation of the three elements constituting the value of a compound option.

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John Wiley & Sons Inc

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Business, Finance

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Journal Of Futures Markets

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10.1002/fut.10048

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