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Arbitrage, Continuous Trading, and Margin Requirements

  • Heath, David C
  • Jarrow, Robert A

This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of ca ll options. In the context of the Black-Scholes economy, margin restr ictions are shown to exclude continuous-trading arbitrage opportuniti es, and with two additional hypotheses, to still allow the Black-Scho les call model to apply. The Black-Scholes economy consists of a cont inuously-traded stock whose price process follows a geometric Brownia n motion and a continuously-traded bond whose price process is determ inistic. Copyright 1987 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 42 (1987)
Issue (Month): 5 (December)
Pages: 1129-42

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Handle: RePEc:bla:jfinan:v:42:y:1987:i:5:p:1129-42
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