Option Pricing and Hedging Bounds in Incomplete Markets
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Author | : Tao Hao |
Publisher | : |
Total Pages | : 14 |
Release | : 2009 |
ISBN-10 | : OCLC:1290290215 |
ISBN-13 | : |
Rating | : 4/5 (15 Downloads) |
Book Synopsis Option Pricing and Hedging Bounds in Incomplete Markets by : Tao Hao
Book excerpt: This paper has reviewed the literature on options pricing in incomplete markets. A tight upper and lower bounds can be derived based on the assumptions of mean and variance of the underlying asset price, not on its entire distribution. The differences between estimated upper or lower bounds and Black-Scholes price are quite small for deep in-the-money options, but can be very significant for deep out-of-the-money options. But at the same time, despite the wide pricing bounds, analysis of the implied hedging bounds suggests that the implications for asset allocation of incomplete markets are fairly limited.