IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpfi/9601001.html
   My bibliography  Save this paper

Option Pricing & Partial Hedging: Theory Of Polish Options

Author

Listed:
  • Erik Aurell

    (Artificial Economy Project, PDC/KTH, S-100 44 Stockholm, Sweden)

  • Karol Zyczkowski

Abstract

The twin problems of hedging and pricing of options in discrete-time markets are analyzed. We consider trading strategies consisting of one stock and one bond. The bond price rises deterministically over time while the stock price can change in several (more than two) ways at each instant of trading. Given such stock price movements, perfect hedging is not possible, and arbitrage arguments alone are not sufficient. We deter- mine hedging and bid and ask prices by balancing expected gain against risk. Using a recent approach of Bouchaud and Sornette, we work out in detail the case where the mean rate of return of the stock differs from that of the bond. We identify a new kind of strategy open to operators that are sufficiently insensitive to risk. We find a candidate for market price of risky options, which reduces to the Black- Scholes prescription when risk can be eliminated. We report on data on stock price movements on the Warsaw Stock Exchange, and show that they are well described by a simple model where prices on each day can either increase, decrease or stay the same. We work out the details of the option pricing and hedging problems in this case.

Suggested Citation

  • Erik Aurell & Karol Zyczkowski, 1996. "Option Pricing & Partial Hedging: Theory Of Polish Options," Finance 9601001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9601001
    Note: 30 pages, PostScript format 969 kb, uuencoded. Five figures, available separately from K. \.Zyczkowski upon request.
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/9601/9601001.pdf
    Download Restriction: no
    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/9601/9601001.ps.gz
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Erik Aurell & Karol .Zyczkowski, 1998. "Risk-return arguments applied to options with trading costs," Papers cond-mat/9803238, arXiv.org.
    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

    JEL classification:

    • G - Financial Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:9601001. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.