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Strategic option pricing

Author

Listed:
  • Bieta Volker

    (Technische Universität Dresden, 01062Dresden, Germany)

  • Broll Udo

    (Center of International Studies (ZIS), Technische Universität Dresden, 01062Dresden, Germany)

  • Siebe Wilfried

    (Universität Rostock, 18051Rostock, Germany)

Abstract

In this paper an extension of the well-known binomial approach to option pricing is presented. The classical question is: What is the price of an option on the risky asset? The traditional answer is obtained with the help of a replicating portfolio by ruling out arbitrage. Instead a two-person game from the Nash equilibrium of which the option price can be derived is formulated. Consequently both the underlying asset’s price at expiration and the price of the option on this asset are endogenously determined. The option price derived this way turns out, however, to be identical to the classical no-arbitrage option price of the binomial model if the expiration-date prices of the underlying asset and the corresponding risk-neutral probability are properly adjusted according to the Nash equilibrium data of the game.

Suggested Citation

  • Bieta Volker & Broll Udo & Siebe Wilfried, 2020. "Strategic option pricing," Economics and Business Review, Sciendo, vol. 6(3), pages 118-129, August.
    • Handle: RePEc:vrs:ecobur:v:6:y:2020:i:3:p:118-129:n:7
    DOI: 10.18559/ebr.2020.3.7
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    References listed on IDEAS

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    5. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    option pricing; game theory; Nash equilibrium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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