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Article
On the Pricing of Power and Other Polynomial Options
in Journal of Derivatives, 13 (4)
ISSN : 1074-1240Voir la revue «The Journal of Derivatives»
Options with non-linear payoffs offer flexibility to investors, but there are few closed formulas known for European options with non-linear payoffs. An adapted decomposition of the payoff can facilitate pricing with closed-form formulas. We show that it is possible to price a polynomial option by expressing it as a combination of several power options with adapted strikes. The general result is independent of the particular dynamics followed by the underlying. Several packages and parabolic
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calls are studied, along with an example of polynomial options in portfolio selection.
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