When Does Extra Risk Strictly Increase an Option's Value?
AbstractIt is well known that risk increases the value of options. This paper makes that precise in a new way. The conventional theorem says that the value of an option does not fall if the underlying option becomes riskier in the conventional sense of the mean-preserving spread. This paper uses two new definitions of "riskier" to show that the value of an option strictly increases (a) if the underlying asset becomes "pointwise riskier," and (b) only if the underlying asset becomes "extremum riskier."
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Bibliographic InfoPaper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2004-12.
Date of creation: 2004
Date of revision:
Publication status: Forthcoming in Review of Financial Studies
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Other versions of this item:
- Eric Rasmusen, 2007. "When Does Extra Risk Strictly Increase an Option's Value?," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1647-1667, 2007 14.
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