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Unique Option Pricing Measure with neither Dynamic Hedging nor Complete Markets

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  • Nassim Nicholas Taleb

Abstract

Proof that under simple assumptions, such as constraints of Put†Call Parity, the probability measure for the valuation of a European option has the mean derived from the forward price which can, but does not have to be the risk†neutral one, under any general probability distribution, bypassing the Black†Scholes†Merton dynamic hedging argument, and without the requirement of complete markets and other strong assumptions. We confirm that the heuristics used by traders for centuries are both more robust, more consistent, and more rigorous than held in the economics literature. We also show that options can be priced using infinite variance (finite mean) distributions.

Suggested Citation

  • Nassim Nicholas Taleb, 2015. "Unique Option Pricing Measure with neither Dynamic Hedging nor Complete Markets," European Financial Management, European Financial Management Association, vol. 21(2), pages 228-235, March.
    • Handle: RePEc:bla:eufman:v:21:y:2015:i:2:p:228-235
    DOI: 10.1111/eufm.12055
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    References listed on IDEAS

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    Cited by:

    1. R. Guy Thomas, 2023. "Long-term option pricing with a lower reflecting barrier," Papers 2302.05808, arXiv.org.

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