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A Delayed Black and Scholes Formula I

Author

Listed:
  • Mercedes Arriojas
  • Yaozhong Hu
  • Salah-Eldin Mohammed
  • Gyula Pap

Abstract

In this article we develop an explicit formula for pricing European options when the underlying stock price follows a non-linear stochastic differential delay equation (sdde). We believe that the proposed model is sufficiently flexible to fit real market data, and is yet simple enough to allow for a closed-form representation of the option price. Furthermore, the model maintains the no-arbitrage property and the completeness of the market. The derivation of the option-pricing formula is based on an equivalent martingale measure.

Suggested Citation

  • Mercedes Arriojas & Yaozhong Hu & Salah-Eldin Mohammed & Gyula Pap, 2006. "A Delayed Black and Scholes Formula I," Papers math/0604640, arXiv.org.
    • Handle: RePEc:arx:papers:math/0604640
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    References listed on IDEAS

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    7. Scott, Louis O., 1987. "Option Pricing when the Variance Changes Randomly: Theory, Estimation, and an Application," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(4), pages 419-438, December.
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