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A Model For Pricing An Option With A Fuzzy Payoff

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Author Info

  • Muzzioli, Silvia

    (University of Modena and Reggio Emilia)

  • Torricelli, Costanza

    (University of Modena)

Abstract

This paper sets up a one period model for pricing an option with a fuzzy payoff. The option is written on an underlying asset that has a fuzzy price at the end of the period, modelled by means of triangular fuzzy numbers. The pricing methodology used is the standard one for pricing derivatives, i.e. the so called risk neutral valuation. Combining the standard Binomial Option Pricing Model with a fuzzy representation of the option payoff offers some advantages. First it provides an intuitive way of looking at the future price of an asset. Second it includes the results of the Standard Binomial Model, allowing the market to have different levels of information.

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Bibliographic Info

Article provided by International Association for Fuzzy-set Management and Economy (SIGEF) in its journal FUZZY ECONOMIC REVIEW.

Volume (Year): VI (2001)
Issue (Month): 1 (May)
Pages: 49-87

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Handle: RePEc:fzy:fuzeco:v:vi:y:2001:i:1:p:49-87

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Related research

Keywords: Pricing; Options; Fuzzy Sets;

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Cited by:
  1. Collan, Mikael, 2004. "Giga-Investments: Modelling the Valuation of Very Large Industrial Real Investments," MPRA Paper 4328, University Library of Munich, Germany.
  2. Collan, Mikael, 2008. "New Method for Real Option Valuation Using Fuzzy Numbers," Working Papers 466, IAMSR, Åbo Akademi.
  3. Collan, Mikael & Fullér, Robert & József, Mezei, 2008. "A Fuzzy Pay-off Method for Real Option Valuation," MPRA Paper 13601, University Library of Munich, Germany.

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