
 Margrabe, William, "The Value of an Option to Exchange One Asset for Another", Journal of Finance, Vol. 33, No. 1, (March 1978), pp. 177186. Introduction: Some common financial arrangements are equivalent to options to exchange one risky asset for another: the investment adviser's performance incentive fee, the general margin account, the exchange offer, and the standby commitment. Yet the literature does not discuss the theory of such an option. In this paper, I develop an equation for the value of the option to exchange one risky asset for another. My theory grows out of the brilliant BlackScholes (1973) solution to the longstanding call option pricing problemwhich assumes that the price of a riskless discount bond grew exponentially at the riskless interest ratand Merton's (1973) extensionin which the discount bond's value is stochastic until maturity. This paper is republished as Ch.12 in... 