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A Paradox Of Intuition: Hedging The Limit Or Hedging In The Limit?

Author

Listed:
  • J. R. SOBEHART

    (Citigroup Risk Architecture, 599 Lexington Avenue, NY 10022, USA)

  • S. C. KEENAN

    (Citigroup Risk Architecture, 599 Lexington Avenue, NY 10022, USA)

Abstract

Here we review the notion of covergence in Itô calculus and its application to the Black-Scholes options pricing model and its extensions. The concept of covergence is fundamental to the development of the differential calculus of stochastic processes. It is also the key to understanding the validity of the no arbitrage condition imposed by Black and Scholes (1973) that leads to their options pricing equation.

Suggested Citation

  • J. R. Sobehart & S. C. Keenan, 2002. "A Paradox Of Intuition: Hedging The Limit Or Hedging In The Limit?," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(07), pages 729-736.
    • Handle: RePEc:wsi:ijtafx:v:05:y:2002:i:07:n:s0219024902001705
    DOI: 10.1142/S0219024902001705
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