Imprecise Volatility and Option Replication and Hedging

Result code in IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F61989100%3A27510%2F07%3A00014634" target="_blank" >RIV/61989100:27510/07:00014634 - isvavai.cz</a>

Result on the web

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DOI - Digital Object Identifier

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Result language

čeština

Original language name

Imprecise Volatility and Option Replication and Hedging

Original language description

Option pricing is usually done within the risk-neutral world. The justification is the ability to set up a replication portfolio - the portfolio, consisting of the underlying asset and the riskless investment, which will replicate the target payoff of the option for all states of the world. If the portfolio exists, it can be used to set up hedged, and therefore riskless, portfolio. It means, that the real world drift does not play any role and we can use the riskless rate in order to both, model the future payoff and discount it back to the beginning. The only problem which remains is how to specify the underlying asset price risk - the volatility of its returns. In this paper, we reformulate the binomial model for the case of unknown volatility. We propose formulas for both, replication and hedging portfolio.

Czech name

Imprecise Volatility and Option Replication and Hedging

Czech description

Option pricing is usually done within the risk-neutral world. The justification is the ability to set up a replication portfolio - the portfolio, consisting of the underlying asset and the riskless investment, which will replicate the target payoff of the option for all states of the world. If the portfolio exists, it can be used to set up hedged, and therefore riskless, portfolio. It means, that the real world drift does not play any role and we can use the riskless rate in order to both, model the future payoff and discount it back to the beginning. The only problem which remains is how to specify the underlying asset price risk - the volatility of its returns. In this paper, we reformulate the binomial model for the case of unknown volatility. We propose formulas for both, replication and hedging portfolio.

Type

D - Article in proceedings

CEP classification

AH - Economics

OECD FORD branch

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Project

<a href="/en/project/GP402%2F05%2FP085" target="_blank" >GP402/05/P085: Application of replication methods in pricing and hedging of financial derivatives at non-perfect market</a><br>

Continuities

P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)

Publication year

2007

Confidentiality

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Article name in the collection

Mathematical Methods in Economics

ISBN

978-80-248-1457-5

ISSN

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e-ISSN

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Number of pages

9

Pages from-to

1-8

Publisher name

VŠB-TU Ostrava

Place of publication

Ostrava

Event location

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Event date

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Type of event by nationality

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UT code for WoS article

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