Valuation of Compound Options under Jump-diffusion Model

Abstract

We discuss a general risk-neutral pricing of compound option under jump- diffusion model with log-normally distributed jumps. Call on call option is dis- cussed in detail and other types of compound option can be handled similarly. We obtain an explicit pricing formula which is a series of Black-Scholes type for- mulas. The resulting pricing formula is further examined under a specific risk- neutral measure.