Hi all,
I work in energy and I’ve been researching a framework for valuing storage assets. Continuing the work requires a pretty solid grasp of compound options (specifically call on call options).
Does anyone in the forum have experience with call on call options and the math behind them? Can anyone point me to specific resources I can use to read up on them? Google seems to have limited results.
Cheers!
You can consult chapter 25 of Options, Futures and Other Derivatives by John Hull. It uses result from a paper published by R Geske, titled “The valuation of Compound Options”. The paper is freely available (a simple google search should be enough to find the paper), but it’s pretty technical. Hull just gives a nice summary of the results. The downside is, it’s far too short. It basically just gives you the formula and moves on. Compound Call/Put options are also explained in Derivatives Market by Robert McDonald, albeit without giving an explicit formula. Still, it’s worth a read, since the author explains compound options in an intuitive manner.