Negative Call Prices
AbstractWe show that the existence of an equivalent local martingale measure for asset prices does not prevent negative prices for European calls written on positive stock prices. In particular, we illustrate that many standard no-arbitrage arguments implicitly rely on conditions stronger than the No Free Lunch With Vanishing Risk (NFLVR) assumption. The discrepancy between replicating prices and market prices for a contingent claim may be observed in a model satisfying NFLVR since certain trading strategies of buying one portfolio and selling another one are often excluded by standard admissibility constraints.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1204.1903.
Date of creation: Apr 2012
Date of revision: Jan 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-17 (All new papers)
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