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Arbitrage, Continuous Trading, and Margin Requirements

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  • Heath, David C
  • Jarrow, Robert A

Abstract

This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of ca ll options. In the context of the Black-Scholes economy, margin restr ictions are shown to exclude continuous-trading arbitrage opportuniti es, and with two additional hypotheses, to still allow the Black-Scho les call model to apply. The Black-Scholes economy consists of a cont inuously-traded stock whose price process follows a geometric Brownia n motion and a continuously-traded bond whose price process is determ inistic. Copyright 1987 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 42 (1987)
Issue (Month): 5 (December)
Pages: 1129-42

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Handle: RePEc:bla:jfinan:v:42:y:1987:i:5:p:1129-42

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Cited by:
  1. Santa-Clara, Pedro & Saretto, Alessio, 2009. "Option strategies: Good deals and margin calls," Journal of Financial Markets, Elsevier, vol. 12(3), pages 391-417, August.
  2. Alessandro Fiori Maccioni, 2011. "Endogenous Bubbles in Derivatives Markets: The Risk Neutral Valuation Paradox," Papers 1106.5274, arXiv.org, revised Sep 2011.
  3. A. Fiori Maccioni, 2011. "The risk neutral valuation paradox," Working Paper CRENoS 201112, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.

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