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- Title
The Analytics of Reset Options.
- Authors
Wai-Yan Cheng; Shuguang Zhang
- Abstract
The authors study a new type of path-dependent option called a reset option. On each of a set of prespecified dates, the strike price of a reset option will be reset to the prevailing stock price if the option is out of the money. Its relationships with other exotic options are examined. A closed-form pricing formula in terms of the multivariate normal distribution is derived under the risk-neutral framework. Analysis of the pricing and hedge parameter formulas reveals a simple interpretation of the option and hedging difficulties around reset dates. Extension to the case of using geometric average as reset trigger is also given.
- Subjects
OPTIONS (Finance); EXOTIC options (Finance); STOCK options
- Publication
Journal of Derivatives, 2000, Vol 8, Issue 1, p59
- ISSN
1074-1240
- Publication type
Article
- DOI
10.3905/jod.2000.319114