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A General Framework for Hedging and Speculating with Options

Author

Listed:
  • Ralf Korn

    (FB Mathermatik, Johannes Gutenberg-Universitaet, 55099 Mainz, Germany)

  • Paul Wilmott

    (Mathematical Institute, Oxford University, Dept. of Mathematics, Imperial College, London, UK)

Abstract

In contrast to their role in theory, options are in practice not only traded for hedging purposes. Many investors also use them for speculation purposes. For these investors the Black–Scholes price serves only as an orientation, their decisions to buy, hold or hedge an option are also based on subjective beliefs and on their personal utility functions (in the widest possible sense). The aim of this paper is to present a general framework to include different types of investors, especially hedgers, pure speculators and speculators following strategies with bounded risk. We derive their subjective values of an option endogenously from the solution of their decision problems.

Suggested Citation

  • Ralf Korn & Paul Wilmott, 1998. "A General Framework for Hedging and Speculating with Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 1(04), pages 507-522.
    • Handle: RePEc:wsi:ijtafx:v:01:y:1998:i:04:n:s0219024998000278
    DOI: 10.1142/S0219024998000278
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