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Factor Models for Option Pricing |
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| Authors: | Peter Carr Dilip B Madan |
| Institution: | 1. Mathematics Department, Courant Institute of Mathematical Sciences, New York University, 251 Mercer Street, New York, NY, 10012, USA 2. Robert H. Smith School of Business, University of Maryland College Park, Van Munching Hall, College Park, MD, 20742, USA |
| Abstract: | Options on stocks are priced using information on index options and viewing stocks in a factor model as indirectly holding index risk. The method is particularly suited to developing quotations on stock options when these markets are relatively illiquid and one has a liquid index options market to judge the index risk. The pricing strategy is illustrated on IBM and Sony options viewed as holding SPX and Nikkei risk respectively. |
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