Capital markets are not perfect or frictionless, and arbitrage mechanism cannot be complete, particularly for index arbitrage. This study constructs a theoretical foundation to explain why the price expectation of the underlying asset should be entered into the pricing formula of stock index...

This study utilizes a multi-period structural model developed by Chen and Yeh (Pricing credit default swaps with the extended Geske–Johnson Model. Working paper, <CitationRef CitationID="CR10">2006</CitationRef>), which extends the Geske and Johnson (J Financ Quant Anal 19:231–232, <CitationRef CitationID="CR18">1984</CitationRef>) compound option model to evaluate the...</citationref></citationref>