Advanced Search
MyIDEAS: Login to save this paper or follow this series

Pricing and Hedging Basis Risk under No Good Deal Assumption

Contents:

Author Info

  • Laurence Carassus

    ()
    (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris Diderot - Paris 7)

  • Emmanuel Temam

    ()
    (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris Diderot - Paris 7)

Registered author(s):

    Abstract

    We consider the problem of pricing and hedging an option written on a non-exchangeable asset when trading in a correlated asset is possible. This is a typical case of incomplete market where it is well known that the super-replication concept provides generally too high prices. Here, following J.H. Cochrane and J. Saá-Requejo, we study valuation under No Good Deal (NGD) Assumption. First, we clarify the notion of NGD for dynamic strategies, compute a lower and an upper bound and prove that in fact NGD price can be strictly higher that the one previously compute in the literature. We also propose a hedging strategy by imposing criterium on the variance of the replication's error. Finally, we provide various numerical illustrations showing the efficiency of NGD pricing and hedging.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://hal.archives-ouvertes.fr/docs/00/60/94/97/PDF/Good_deal.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number hal-00498479.

    as in new window
    Length:
    Date of creation: 07 Jul 2010
    Date of revision:
    Handle: RePEc:hal:wpaper:hal-00498479

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00498479/en/
    Contact details of provider:
    Web page: http://hal.archives-ouvertes.fr/

    Related research

    Keywords: No Good Deal; basis risk; mean variance hedging;

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Giovanni Di Masi & Tomas Björk & Wolfgang Runggaldier & Yuri Kabanov, 1997. "Towards a general theory of bond markets (*)," Finance and Stochastics, Springer, vol. 1(2), pages 141-174.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00498479. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.