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Arbitrage: the key to pricing options

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Abstract

Arbitrage has become associated in popular attitudes with the most ruthless and profit-driven of human impulses, but the opposite reputation might be more well-deserved. The ability to arbitrage is essential for the efficient operation of markets. An interesting application of the principle of arbitrage arose when it provided the breakthrough insight in economists? solution to a formerly intractable problem: how to properly price the emergent financial instruments known as options.

Suggested Citation

  • Ed Nosal & Tan Wang, 2004. "Arbitrage: the key to pricing options," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jan.
    • Handle: RePEc:fip:fedcec:y:2004:i:jan1
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    Cited by:

    1. Magni, Carlo Alberto, 2016. "Capital depreciation and the underdetermination of rate of return: A unifying perspective," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 54-79.

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    Keywords

    options; Arbitrage;

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