Curved Option Payoffs
|Author(s):||Garry de Jager and Joseph Winsen|
|Date of publication:||July 1992|
|Working paper number:||19|
An increasing number of securities and corporate cashflows have been identified partly or wholly as options with the familiar pieswise linear payoff function. And it has been recognised non-linear payoffs can in principle be approximated by a portfolio of (piecewise linear) options. This paper considers the valuation of nonlinear payoffs directly by defining a "curved option" payoff, illustrating the approach for a European call option on a non-dividend paying stock and highlighting the advantages for traders in running a book of such options.
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