A generalization of Gray and Whaley’s reset option

Abstract

Underlying asset price varies significantly during the life-time option. In order to make options’ markets more liquid, the article proposes a general valuation of reset option of Gray and Whaley in which all options are replaced by At-the-Money ones by resetting the strike price X at the underlying asset price S t at pre-specified reset date t, before expiration reset maturity T. First, the article proposes a closed-form solution for the pricing of the generalization of Gray and Whaley’s reset option. Second, we use the CRR binomial approach and an estimation program of the cumulative bivariate normal distribution to derive an analytic representation of the price function of GR option.