The Black-Scholes-Merton dual equation

Abstract

We derive the Black-Scholes-Merton dual equation, which has exactly the same form as the Black-Scholes-Merton equation. The novel and general equation works for options with a payoff of homogeneous of degree one, including European, American, Bermudan, Asian, barrier, lookback, etc., and leads to new insights into pricing and hedging. Perceptibly, a put-call equality emerges - all the put options can be priced as their corresponding calls by simultaneously swapping stock price (dividend yield) for strike price (risk-free rate), and vice versa. Equally important, we provide simple analytic formulas for hedging parameters delta and gamma, which elevate the put-call equality to true practical applicability. For futures options, the put-call equality leads to "symmetric" properties between puts and calls or among puts (calls).

34 pages, 5 tables