A General Framework for Hedging and Speculating with Options

Ralf Korn and Paul Wilmott
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Ralf Korn: FB Mathermatik, Johannes Gutenberg-Universitaet, 55099 Mainz, Germany
Paul Wilmott: Mathematical Institute, Oxford University, Dept. of Mathematics, Imperial College, London, UK

International Journal of Theoretical and Applied Finance (IJTAF), 1998, vol. 01, issue 04, 507-522

Abstract: In contrast to their role in theory, options are in practice not only traded for hedging purposes. Many investors also use them for speculation purposes. For these investors the Black–Scholes price serves only as an orientation, their decisions to buy, hold or hedge an option are also based on subjective beliefs and on their personal utility functions (in the widest possible sense). The aim of this paper is to present a general framework to include different types of investors, especially hedgers, pure speculators and speculators following strategies with bounded risk. We derive their subjective values of an option endogenously from the solution of their decision problems.

Keywords: Options; Black–Scholes models; hedging; speculation; partial differential equations (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1142/S0219024998000278

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