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General Properties of Option Prices

  • Bergman, Yaacov Z
  • Grundy, Bruce D
  • Wiener, Zvi

When the underlying price process is a one-dimensional diffusion, as well as in certain restricted stochastic volatility settings, a contingent claim's delta is bounded by the infimum and supremum of its delta at maturity. Further, if the claim's payoff is convex (concave), the claim's price is a convex (concave) function of the underlying asset's value. However, when volatility is less specialized, or when the underlying process is discontinuous or non-Markovian, a call's price can be a decreasing, concave function of the underlying price over some range, increasing with the passage of time, and decreasing in the level of interest rates. Copyright 1996 by American Finance Association.

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

Volume (Year): 51 (1996)
Issue (Month): 5 (December)
Pages: 1573-1610

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Handle: RePEc:bla:jfinan:v:51:y:1996:i:5:p:1573-1610
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