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Risky Options Simplified

Author

Listed:
  • MARTIN SCHWEIZER

    (Technische Universität Berlin, Fachbereich Mathematik, MA 7-4, Straße des 17. Juni 136, D – 10623 Berlin, Germany)

Abstract

We study a general version of a quadratic approach to the pricing of options in an abstract financial market. The resulting price is the expectation of the option's discounted payoff under the variance-optimal signed martingale measure, and we give a very simple proof of this result. A conjecture of G. Wolczyńska essentially says that this measure coincides with the minimal signed martingale measure in a certain class of models. We show by a counterexample that this conjecture is false.

Suggested Citation

  • Martin Schweizer, 1999. "Risky Options Simplified," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 59-82.
    • Handle: RePEc:wsi:ijtafx:v:02:y:1999:i:01:n:s0219024999000054
    DOI: 10.1142/S0219024999000054
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    Cited by:

    1. Aurell, Erik & Baviera, Roberto & Hammarlid, Ola & Serva, Maurizio & Vulpiani, Angelo, 2000. "Growth optimal investment and pricing of derivatives," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 280(3), pages 505-521.
    2. Schweizer, Martin, 2001. "From actuarial to financial valuation principles," Insurance: Mathematics and Economics, Elsevier, vol. 28(1), pages 31-47, February.

    More about this item

    Keywords

    Option pricing; Mean-variance hedging; Variance-optimal martingale measure; Minimal martingale measure; Risky options; JEL classification Numbers G10; 90A09;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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