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No arbitrage pricing of non-marketed claims in multi-period markets

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  • Christos E. Kountzakis

Abstract

In this paper, we modify the arbitrage-free interval of prices for a non-marketed contingent claim in the finite event-tree model of financial markets, according to the perfect hedging approach being well-known for the two-period model. We prove the existence of solution to the corresponding seller's and buyer's price problem for such a claim under no-arbitrage prices for the marketed contracts and we show that each of these problems can be solved by decomposing it into a finite number of one-period linear programming problems solved backwards. Finally, we indicate that the set of the no-arbitrage prices for a non-marketed contingent claim is the interval of the real numbers whose supremum and infimum is the seller's and the buyer's price of the claim, respectively. The determination of the set of no-arbitrage prices for a non-marketed contingent claim is related to the utility pricing of such a claim.

Suggested Citation

  • Christos E. Kountzakis, 2010. "No arbitrage pricing of non-marketed claims in multi-period markets," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 1(2), pages 125-154.
    • Handle: RePEc:ids:ijfmkd:v:1:y:2010:i:2:p:125-154
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