The valuation of options with restrictions on preferences and distributions

This article develops a discrete-time, risk-neutral valuation relation (RNV R) for the pricing of contingent claims when preferences in the economy are characterized by decreasing absolute risk aversion and the marginal distri bution of the underlying is an inverse coshnormal. The RNVR is applied to o btain closed-form expressions for calls and puts written on nondividend-pay ing stocks, futures contracts, foreign currencies, and dividend-paying stoc ks. Such pricing equations contain two parameters, the threshold and rescal e parameters, not contained in the Black-Scholes valuation equation. Invers e-cosh normal option values make the approach look interesting. (C) 2001 Jo hn Wiley & Sons, Inc.