Negative call prices

Johannes Ruf ()

Annals of Finance, 2013, vol. 9, issue 4, 787-794

Abstract: We show that the existence of an equivalent local martingale measure for asset prices does not prevent negative prices for European calls written on positive stock prices. In particular, we illustrate that many standard no-arbitrage arguments implicitly rely on conditions stronger than the No Free Lunch With Vanishing Risk (NFLVR) assumption. The discrepancy between replicating prices and market prices for a contingent claim may be observed in a model satisfying NFLVR since certain trading strategies of buying one portfolio and selling another one are often excluded by standard admissibility constraints. Copyright Springer-Verlag Berlin Heidelberg 2013

Keywords: Pricing; Hedging; Arbitrage; Admissibility; NFLVR; Contingent claim; Strict local martingale; G13 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s10436-012-0221-2

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