Option Pricing

Formula

Type of
Formula

Black-Sc holes-Merton: Chapter I

Type of
Underlying Asset

Distribution of
Underlying Asset

Computer
Code

Black-Scholes (1973)
Merton (1973)

C,E
C,E

S,I

Lognormal
Lognormal

Black(1976)

C,E

Lognormal

Asay (1982)

C,E

Lognormal

C,E

Lognormal

C,E

S,l,F,C

Lognormal

C,E

S,I,F,C

Lognormal

C,E
C,E
C,E
C,E

s
s
s
s

Normal
Lognormal
Lognormal
Lognormal

Garman and
Kohlhagen(1983)and
Grabbe(1983)
Generalized
Black-Scholes and
Merton
Black-ScholesMerton on variance
form
Bachelier(1900)
Sprenkle (1964)
Boness(1964)
Samuelson(1965)

Short Description

The breakthrough in option pricing.

Extension of Black-Scholes formula
including a dividend yield.
Modified Black-Scholes for options on
forward or futures.
Modified Black-76 for options that are fully
margined.
Modified Black-Scholes for options on
currencies.
Combines all the models above into one
formula.
Use variance as input instead of standard
deviation.
The first breakthrough in option valuation.
Precursor to Black-Scholes-Merton.
Precursor to Black-Scholes-Merton.
Precursor to Black-Scholes-Merton, takes
into account that the expected return for
call option is greater than for stock.

Analytical Approximations for American Options: Chapter 3

Barone-Adesi and
Whaley (1987)
Bjerksund and
Stensland (1993)
Bjerksund and
Stensland (2002)
American Perpetual

P,A

S,I,F,C

Lognormal

P,A

S,l,F,C

Lognormal

P,A

S,I,F,C

Lognormal

C,A

S,I,F,C

Lognormal

Exotic Options-Single Asset: Chapter 4

Variable Purchase
Options
Executive stock option

C,E

S,I,F,C

Lognormal

C,E

S,I

Lognormal

Moneyness option

C,E

S,I,F,C

Lognormal

Power contract
Standard power option
(Asymmetric power
option)
Capped power option
(Capped asymmetric
option)
Powered option
(Symmetric power
option)
Log contract

C,E
C,E

S,I,F,C
S,I,F,C

Lognormal
Lognormal

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

Log option

C,E

S,I,F,C

Lognormal

Approximation much used in practice.

Extremely computer efficient.
Accurate and efficient.
Infinite time to maturity.
Number of underlying shares deterministic
function of the asset price.
Take into account the probability that the
executive will stay with the firm until the
option expires.
Premium in percent of forward, strike in
percentage in- or out-of-the money.
Contract where payoff is powered.
Option where asset is powered, gives high
leverage.
Option where asset is powered, but
maximum payoff is capped.
Option where payoff is powered, gives high
leverage.
Contract where payoff is natural logarithm of
asset. Building block in var and vol swaps.
Option where payoff is natural logarithm of
asset.

Type of
Formula

Type of
Underlying Asset

Distribution of
Underlying Asset

Computer
Code

Forward start option

C,E

S,I,F,C

Lognormal

Fade-in option

C,E

S,I,F,C

Lognormal

Ratchet option (Cliquet

option)
Reset strike option

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

Discrete time-switch
option
Simple chooser option
(as-you-like-it option)
Complex chooser option

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

Options on options
(compound options)
Buyer-extendible option

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

C,E

8,1,F,C

Lognormal

C,E

S,I,F,C

Lognormal

C,E

S,I,C

Lognormal

Option Pricing
Formula

Writer-extendible
option
Floating strike lookback
option (no-regrets
option)
Fixed strike lookback
option (hindsight
option)

Short Description
Starts at-the-money or proportionally in- or
out-of-the-money after a known elapsed
time into the future.
Payoff weighted by how many fixings the
asset inside a predefined range.
A series of forward starting options.
Strike is reset to the asset price at a
predetermined future time.
Accumulates cash for every time unit the
option is in-the-money.
Gives the right to choose between a call and
put option.
Offers more flexibility than a simple chooser
option.
Option on a plain vanilla option: call on call,
call on put, put on call, and put on put.
Option that can be extended by the option
holder.
Option that will be extended by the writer if
the option is out-of-the-money.
Options to sell at maximum or buy at
minimum observed price.
An observed maximum or minimum asset
price against a fixed strike.

Partial-time floating
strike lookback option

C,E

S,I,C

Logn onnal

Partial-time fixed strike

lookback option

C,E

S,I,C

Lognormal

Extreme spread option

C,E

S,I,C

Lognonnal

Mirror option

C,E

S,l,F,C

Lognormal

Standard barrier option

(inside barrier option)

C,E

S,I,F,C

Lognonnal

American barrier option

Double barrier option

C,A
C,E

S,I,F,C
S,l, F,C

Lognormal
Lognormal

Partial-time
single-asset barrier
option
Discrete barrier option

C,E

S,I,F,C

Lognormal

C,E

S, I, F,C

Lognormal

Look-barrier option

C,E

S,I,C

Lognormal

Soft-barrier option

C,E

S,I,C

Lognormal

First-then-barrier
options

C,A

Lognormal

Same as floating strike lookback except

lookback monitoring only in parts of the
option's lifetime.
Same as fixed strike lookback except
lookback monitoring only in parts of the
option's lifetime.
Option on the difference between the
observed maximum or minimum from two
different time periods.
Options where holder can choose to mirror
the path of the underlying asset.
Options where existence is dependent
whenever the asset price hits a barrier level
before expiration.
Same as above, but American
Options with two barriers, one above and one
below the current asset price.
Barrier hits are only monitored in a part of
the options' lifetime.
Adjustment that can be used for pricing
barrier options with discrete barrier
monitoring.
Combination of a partial time barrier option
and a forward start fixed strike lookback
option.
The option has a barrier range and is
knocked in or out partially.
Dependent on lower and upper barrier.

Option Pricing
Formula

Type of
Formula

Type of
Underlying Asset

Distribution of
Underlying Asset

C,E

Lognormal

C,E

Lognormal

C,E

S,I,F,C

Lognormal

Cash-or-nothing option

C,E

S,I,F, C

Lognormal

Asset-or-nothing option

C,E

S,I,F,C

Lognormal

Supershare option

C,E

S,I,F,C

Lognormal

Binary barrier options

( digital option)
Double Barrier Binary
Options
Geometric average option
(Asian option)
Arithmetic average
option (Asian option)

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

P,A

S,I,F,C

Lognormal

Lognormal

Lognormal
Lognormal

Double barrier option

using symmetry
Dual double barrier
option using symmetry
Gap option (pay-later
option)

Exotic Options on Two Assets: Chapter 5

Relative outperformance
C,E
S,I,F,C
option
Product option
C,E
S,I,F,C
Two-asset correlation
C,E
S,I,F,C
option

Computer
Code

Short Description
Options with two barriers, one above and
one below the current asset price.
Gives call if hitting upper barrier,and put
if lower barrier or vice versa.
One strike decides if the option is in or
out-of-the-money; another strike decides
the size of the payoff.
Pays out cash if in-the-money and zero if
out-of-the-money.
Pays out asset if in-the-money; otherwise
pays zero.
Pays out (Asset/Low strike) if the asset
falls between a lower and higher strike.
Can price 28 different binary barrier
options.
Binary option with two barriers,one above
and one below the current asset price.
Option on a geometric average: (x1 . xn) l /n .
Options on an arithmetic average:
(x1 + + Xn) /n.
Option on the relative performance of two
assets.
Option on the product of two assets.
One asset decides if the option is in or
out-of-the-money. Another asset with its
own strike decides the payoff.

Exchange one asset for

another option
option on
exchange option
Option on the maximum
or minimum of two
assets
Spread option
Two-asset barrier option
(outside barrier option)
Partial-time two-asset
barrier option
Margrabe barrier option
Two-asset
option
Best or worst
option
Option on the minimum
and maximum of two
averages
Foreign equity option
stuck in domestic
currency
Fixed exchange rate
foreign equity option
(Quantosl
Equity linked foreign
exchange option
Takeover foreign
exchange option

C,E,A

S,I,F,C

Lognormal

C,E

S,IF
, e
,

Lognormal

C,E

S,I,F, e

Lognormal

PE
,
C,E

S,I,F,e
S,I,F ,e

Lognormal
Lognormal

C,E

S,IF
, C
,

Lognormal

C,E
C,E

S,I,F C
,
S,I,F ,e

Lognormal
Lognormal

C,E

S,I,F,e

Lognormal

C,E

S,I,F C
,

Lognormal

C,E

Sande

Lognormal

C,E

SandC

Lognormal

C,E

Sande

Lognormal

C,E

SandC

Lognormal

Option to exchange one asset for another.

Can be used to value sequential exchange
opportunities.
Call or put options on the maximum or
minimum of two assets.
Option on the difference between two assets.
One asset decides barrier hits; the other
asset decides payoff.
Barrier hits are only monitored in a part of
the option's lifetime.
Barrier option on ratio of two assets.
Two assets and two strikes decide if the
option pays out a cash amount or nothing.
Pays predefined cash amount depending on
two asset.
Max-min option, but on two averages.
Options on foreign equity in domestic
currency.
Foreign equity option with fixed
rate.

FX option where quantity depends on foreign

equity price.
FX option that only can be exercised if
takeover is successful.

Option Pricing
Formula
Chapter 6
Settlement adjusted
BSD
French (1984) trading
day adjusted
Wilmott (2000)
discrete hedging
Leland (1985)
transaction costs
Lo and Wang (1995)
trending markets
Hagan and Woodward
(1999) (Cox and Ross
(1976)) CEV
Jarrow and Rudd
(1982) skewness and
kurtosis
Corrado and Su (1996)
skewness and
kurtosis
Ray (1993) Pascal
distribution
Merton (1976) Jump
Diffusion
Bates (1991) Jump
Diffusion
Hull and White (1987)
stochastic volatility
Hull and W hite (1988)
stochastic volatility

Distribution of
Underlying Asset

Computer
Code

Type of
Formula

Type of
Underlying Asset

C,E

S,I,F, C

Lognormal

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

C,E

S,I,F,C

Lognormal

P,E

P,E

S,I,F,C

Various
Non-specified

P,E

S,I,F,C

Various
Non-specified

P,E

Pascal

C,E

Jump diffusion 1

C,E

,Jump diffusion 1

P,E

S,I,F,C

P,E

S,I,F, C

Constant elasticity
of variance

Stochastic
volatility
Stochastic
volatility

Short Description

Black-Scholes adjusted for non-instant

settlement.
Black-Scholes adjusted for trading day
volatility.
Black-Scholes adjusted for discrete
Black-Scholes adjusted for hedging with
transaction cost.
Black-Scholes adjusted for trending
markets.
Black-Scholes adjusted for constant
elasticity of variance.
Black-Scholes adjusted for skewness and
kurtosis.
Black-Scholes adjusted for skewness and
kurtosis.
Black-Scholes type model but with Pascal
distribution.
First jump-diffusion process model.
G1!neralized jump-diffusion model.
Stochastic volatility model based on
Taylor series.
Stochastic volatility model based on
Taylor series.

SABRmodel
stochastic volatility

P,E

Variance swap

Volatility swap

Stochastic
volatility

Stochastic
volatility
Garch(l,l)

Trees and Finite Difference Methods: Chapter 7

Binomial trees

N, E, and A

S,I,F,C

Lognormal

Barrier option in
binomial trees

N, E, and A

S,I,F,C

Lognormal

Convertible bonds in
binomial trees

N, E, and A

Stock and bond

Lognormal Stock

Trinomial trees

N,E, and A

S,I,F,C

Lognormal

Three-dimensional
binomial trees

N, E, and A

S,I,F,C

Lognormal

Implied binomial trees

N,E,and A

S,I,F,C

Implied
distribution from
market data

Implied trinomial
trees

N, E, and A

S,I,F,C

Explicit finite
difference

N, E, and A

S,I,F,C

Implied
distribution from
market data
Lognormal

Implicit finite
difference
Crank-Nicholson
method

N, E, and A

S,I,F,C

Lognormal

N, E, and A

S,I,F,C

Lognormal

Practical and promising stochastic

volatility model.
Variance swap based on static hedging.
Volatility swap based on Garch(l,1) model.
Can be used to value most types of single
asset options.
A "standard" binomial tree where the
number of time steps is adjusted so the
barrier falls on the nodes.
Convertible bond valuation with variable
credit adjusted discount rate.
More computer efficient and gives better
flexibility than binomial trees.
Can be used for valuation of most options
on two correlated assets.
Especially useful for valuation of exotic
options consistent with more liquid plain
vanilla European options.
Offers more flexibility than implied
binomial trees.
Can be used to value most types of single
asset options.
Can be used to value most types of single
asset options.
Can be used to value most types of single
asset options.

Option P ricing
Formula

Type of
Formula

Monte Carlo Simulation: Chapter 8

Standard Monte Carlo
N,E
simulation
Antithetic Monte Carlo
N,E
simulation
N,E
IQMC (Importance
sampling)
N,E
Quasi Random Monte
Carlo simulation
American Monte Carlo
N,E,A
simulation

Type of
Underlying Asset

Distribution of
Underlying Asset

S,l,F,C,R

Dependent on the
simulated process
Dependent on the
simulated process
Dependent on the
simulated process
Dependent on the
simulated process
Dependent on the
simulated process

S,l,F,C,R
S,I,F,C,R
S,I,F,C,R
S, l,F,C,R

Options on Stocks that Pay Discrete Dividends: Chapter 9

Simple vol adjustment
C, E
S
Lognormal
Chriss {1997)
C,E
Haug and Haug (1998)
s
Lognormal
Beneder and Vorst
(2001) volatility
adjustment.
C,E
Bos, Gairat, and
Lognormal
s
Shepeleva (2003)
volatility adjustment.

Computer
Code

Short Description

Very flexible but relatively slow in

computer time.
Very flexible and more accurate than
standard MC.
Very flexible and much faster than
standard MC.
Very flexible and much faster than
standard MC.
Can be used for American options, but
very slow in computer time.
The model is flawed and leads to arbitrage
opportunities.
The approximation is good for most cases,
but can be inaccurate in some cases.
The approximation is good for most cases,
but can be inaccurate in some cases.

Bos and Vandennark

(2002) volatility
adjustment.
Roll-Geske-Wbaley
American call
Non-recombining tree
Haug, Haug, and Lewis
(2003}
Villiger (2005) discrete
dividend yield
Recombining tree
discrete dividend yield

C,E

Lognormal

C,A

"Lognormal

N,E,A

Lognormal

C,E,A

Various

C,E

Lognormal

N,E,A

Lognormal

Commodity and Energy Options: Chapter 10

B1ack-1976F adjusted

C,E

Forward

Lognonnal

Energy swaption

C,E

Swap(Forward)

Lognonnal

Miltersen and Schwartz

(1998) commodity
option model.
Pilipovic {1997}
seasonal

C,E

Forward

Lognonnal 1

N,E,andA

S,I,C,F

Any

The approximation is one of the best but

can be inaccurate in some special cases.
The model is flawed and leads to arbitrage
opportunities.
Robust and accurate but slow and
theoretically not very sound.
Robust and accurate and theoretically
sound; should be benchmark model.
Closed fonn, computer efficient, and
theoretically sound.
Robust and accurate, computer efficient,
and theoretically sound.
Black-76 adjusted for options on forwards
expiring after the option.
Black-76 adjusted for options on
commodity/energy swaps.
Three-factor model with stochastic term
structures of convenience yields and
forward interest rates.
Seasonality adjustment that can be
applied to Monte Carlo.

Option Pricing
Formula

Typeof
Formula

Type of
Underlying Asset

Distribution of
Underlying Asset

-----

Interest Rate Derivatives: Chapter 11

Black7 6 for options

on money market
futures
Black 76 cap and floor
model
Modified Black-76
swaption model
Black-76 for options
on bonds

C,E

Implied forward rates

Lognormal forward
rates

C,E

Implied forward rates

C,E

Swap rate

C,E

Forward price of bond

Lognormal forward
rates
Lognormal swap
rate
Lognormal bond
forward price

Schaefer and
Schwartz (1987)
adjusted
Black-Scholes model
Rendleman and
Barter (1980)
Vasicek (1977)

C,E

Bond price

N,E, andA

C,E,N,A

Ho and Lee (1986)

C,E,N,A

Hull and White (1990)

C,E,N,A

N,E, andA

Black, Derman, and

Toy (1990)

Computer
Code

Lognormal

Lognormal interest
rate
Normal interest
rate mean
reversion
Normal interest
rate
Normal interest
rate mean
reversion
Lognormal interest
rate

Short Description

Value call on futures as put on implied

yield and vice versa.
A whole series of options on implied
forward rates.
Options on interest-rate swaps: payer
and receiver swaptions.
Often used when time to maturity on
the option is short relative to the time
to maturity on the underlying bond.
Allows the price volatility of the bond
to be a function of the bond duration.
No arbitrage-free equilibrium model.

No arbitrage-free equilibrium model.

Arbitrage-free with respect to
underlying zero coupon rates.
Arbitrage-free with respect to
underlying zero coupon rates.

Arbitrage-free with respect to

underlying zero coupon rates.