Arbitrage: the key to pricing options

Ed Nosal and Tan Wang

Economic Commentary, 2004, issue Jan

Abstract: Arbitrage has become associated in popular attitudes with the most ruthless and profit-driven of human impulses, but the opposite reputation might be more well-deserved. The ability to arbitrage is essential for the efficient operation of markets. An interesting application of the principle of arbitrage arose when it provided the breakthrough insight in economists? solution to a formerly intractable problem: how to properly price the emergent financial instruments known as options.

Keywords: options; Arbitrage (search for similar items in EconPapers)
Date: 2004
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