When Does Extra Risk Strictly Increase the Value of Options?

Eric Rasmusen ()

Finance from EconWPA

Abstract: It is well known that risk increases the value of options. This paper makes that precise in a new way. The conventional theorem says that the value of an option does not fall if the underlying option becomes riskier in the conventional sense of the mean-preserving spread. This paper uses two new definitions of ``riskier'' to show that the value of an option strictly increases (a) if the underlying asset becomes ``pointwise riskier,'' and (b) only if the underlying asset becomes ``extremum riskier.''

Keywords: options; risk; mean-preserving spread; calls (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Date: 2004-09-04
Note: Type of Document - pdf; pages: 20
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0409004

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