Funding in option pricing: the Black-Scholes framework extended

Wujiang Lou shows the impact of funding costs on option valuation



The Black-Scholes (BS) option-pricing theory (Black and Scholes 1973; Merton 1973) has become the foundation of modern finance, in both theory and practice. A number of extensions have been developed either to relax assumptions or to deal with practical issues; for example, commodity options (Black 1976), American options on dividend-paying stocks (Barone-Adesi and Whaley 1987) and implied volatility smile (Derman 1994) via local or stochastic volatility (Dupire

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