The valuation of compound options: A correction and an extension

Ren Raw Chen, Wei He

Research output: Contribution to journalJournal Article peer-review

3 Scopus citations


In a 1979 paper, Robert Geske extended the Black-Scholes model to price compound options. The model, in addition to compound options, can be used to price risky debts and American options with known dividends. This article documents the typographical errors in the Greek calculations of the model. Because the Greeks do play a crucial role in hedging, it is helpful that these errors are corrected. For the sake of completeness, this article provides detailed derivations of the Greek formulas and four other important Greeks that are not present in the original paper. Finally, numerical examples are provided to demonstrate the magnitude of the errors.

Original languageEnglish
Pages (from-to)92-104
Number of pages13
JournalJournal of Derivatives
Issue number4
StatePublished - 01 06 2015
Externally publishedYes


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