Theory of Rational Option Pricing

Author: Robert C. Merton

The long history of the theory of option pricing began in 1900 when the French mathematician Louis Bachelier deduced an option pricing formula based on the assumption that stock prices follow a Brownian motion with zero drift. Since that time, numerous researchers have contributed to the theory. The present paper begins by deducing a set of restrictions on option pricing formulas from the assumption that investors prefer more to less...

The Bell Journal of Economics and Management Science 4(1):141-183

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