A PARADOX OF INTUITION: HEDGING THE LIMIT OR HEDGING IN THE LIMIT?

J. R. Sobehart () and S. C. Keenan ()
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J. R. Sobehart: Citigroup Risk Architecture, 599 Lexington Avenue, NY 10022, USA
S. C. Keenan: Citigroup Risk Architecture, 599 Lexington Avenue, NY 10022, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2002, vol. 05, issue 07, 729-736

Abstract: Here we review the notion of covergence in Itô calculus and its application to the Black-Scholes options pricing model and its extensions. The concept of covergence is fundamental to the development of the differential calculus of stochastic processes. It is also the key to understanding the validity of the no arbitrage condition imposed by Black and Scholes (1973) that leads to their options pricing equation.

Keywords: Option pricing; hedging strategy; Itô calculus; convergence and limits (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1142/S0219024902001705

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