This thesis analyses two options pricing models, which are the Black-Scholes model and the compound option pricing model for the equity options on six stocks, which are listed on the US stock markets and traded for the period of May 28, 1998 to November 21,2001.
The compound option pricing model is consistent the market price of options for the out of the money options, especially for the equity options on stocks of which the firm has leveraged. The compound options pricing model also generates the theoretical price of equity options more consistent with the market price of the options for the near to maturity options, which are underpriced under the Black-Scholes model.
This result is brought the assumption about underlying asset's future distribution, which the firm value is taken as underlying asset and the future distribution of firm value is lognormal under compound option pricing model. The introduction of leverage effects allows us the more deep understanding for the theoretical options pricing
