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Good-Deal Option Price Bounds for a Non-Traded Event with Stochastic Return: A Note

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  • Yong-Jin Kim

Abstract

Cochrane and Sa'a-Requejo (2000, Journal of Political Economy) proposed the good-deal price bounds for the European call option on an event that is not a traded asset, but is correlated with a traded asset that can be used as an approximate hedge. One remarkable feature of their model is that the return on an event process explicitly appears in the option price bounds formula, which offered a contrast with the standard option pricing model. We show that the good-deal option price bounds on a non-traded event are obtained as a closed-form formula, when the return on an event is governed by a mean reverting process. Copyright Springer Science+Business Media, Inc. 2004

Suggested Citation

  • Yong-Jin Kim, 2004. "Good-Deal Option Price Bounds for a Non-Traded Event with Stochastic Return: A Note," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 11(2), pages 135-141, June.
    • Handle: RePEc:kap:apfinm:v:11:y:2004:i:2:p:135-141
    DOI: 10.1007/s10690-006-9006-9
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    References listed on IDEAS

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