Arbitrage, Continuous Trading, and Margin Requirements

David C Heath and Robert Jarrow ()

Journal of Finance, 1987, vol. 42, issue 5, 1129-42

Abstract: This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of ca ll options. In the context of the Black-Scholes economy, margin restr ictions are shown to exclude continuous-trading arbitrage opportuniti es, and with two additional hypotheses, to still allow the Black-Scho les call model to apply. The Black-Scholes economy consists of a cont inuously-traded stock whose price process follows a geometric Brownia n motion and a continuously-traded bond whose price process is determ inistic. Copyright 1987 by American Finance Association.

Date: 1987
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