When Does Extra Risk Strictly Increase the Value of Options?
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 EconWPA in its series Finance with number 0409004.
Length: 20 pages
Date of creation: 04 Sep 2004
Date of revision:
Note: Type of Document - pdf; pages: 20
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options; risk; mean-preserving spread; calls;
Find related papers by JEL classification:
- G - Financial Economics
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