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Option pricing in incomplete discrete markets

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  • Grazyna Wolczynska

Abstract

Various methods of option pricing in discrete time models are discussed. The classical risk minimization method often results in negative prices and a natural modification is proposed. Another method of risk minimization using an inductive procedure as in the Cox-Ross-Rubinstein model is also proposed. The definition of the risk interpreted as the maximum of possible loss is discussed.

Suggested Citation

  • Grazyna Wolczynska, 1998. "Option pricing in incomplete discrete markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 5(3-4), pages 165-179.
    • Handle: RePEc:taf:apmtfi:v:5:y:1998:i:3-4:p:165-179
    DOI: 10.1080/135048698334628
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    References listed on IDEAS

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    1. Jean-Philippe Bouchaud & Didier Sornette, 1994. "The Black-Scholes option pricing problem in mathematical finance: generalization and extensions for a large class of stochastic processes," Science & Finance (CFM) working paper archive 500040, Science & Finance, Capital Fund Management.
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    Cited by:

    1. Sergei Fedotov & Sergei Mikhailov, 1998. "Option Pricing Model for Incomplete Market," Papers cond-mat/9807397, arXiv.org, revised Aug 1998.
    2. N. Josephy & L. Kimball & A. Nagaev & M. Pasniewski & V. Steblovskaya, 2006. "An Algorithmic Approach to Non-self-financing Hedging in a Discrete-Time Incomplete Market," Papers math/0606471, arXiv.org.
    3. Pinn, Klaus, 2000. "Minimal variance hedging of options with student-t underlying," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 276(3), pages 581-595.
    4. Sergei Fedotov & Sergei Mikhailov, 2001. "Option Pricing For Incomplete Markets Via Stochastic Optimization: Transaction Costs, Adaptive Control And Forecast," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 179-195.

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    Keywords

    Incomplete Markets; Derivative Securities;

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