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A Diffusion Approximation for the Riskless Profit under Selling of Discrete Time Call Options

Author

Listed:
  • Nagaev, Sergei A.

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna)

Abstract

A discrete time model of a financial market is considered. We focus on the study of a guaranteed profit of an investor which arises when the stock price jumps are bounded. The limit distribution of the profit as the model becomes closer to the classical model of the geometric Brownian motion is established. It is of interest that in contrast with the discrete approximation, no guaranteed profit occurs in the approximated continuous time model.

Suggested Citation

  • Nagaev, Sergei A., 2003. "A Diffusion Approximation for the Riskless Profit under Selling of Discrete Time Call Options," Economics Series 137, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihsesp:137
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    File URL: https://irihs.ihs.ac.at/id/eprint/1511
    File Function: First version, 2003
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    Cited by:

    1. N. Josephy & L. Kimball & A. Nagaev & M. Pasniewski & V. Steblovskaya, 2006. "An Algorithmic Approach to Non-self-financing Hedging in a Discrete-Time Incomplete Market," Papers math/0606471, arXiv.org.

    More about this item

    Keywords

    Asymptotic uniformity; Weak convergence in Skorokhod Space D[0; 1];
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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