The pricing of markedtomarket contingent claims in a noarbitrage economy

Abstract

This paper assumes that the underlying asset prices are lognormally distributed, and derives necessary and sufficient conditions for the valuation of options using a BlackScholes type methodology. It is shown that the price of a futuresstyle, markedtomarket option is given by Black's for Mula if the pricing kernel is lognormally distributed. Assuming that this condition is fulfilled, it is then shown that the BlackScholes for Mula prices a spotsettled contingent claim, if the interestrate accumulation factor is lognormally distributed. Otherwise, the BlackScholes for Mula holds if the product of the pricing kernel and the interestrate accumulation factor is lognormally distributed. © The University of New South Wales.