Pricing and hedging basis risk under no good deal assumption

L. Carassus () and E. Temam ()

Annals of Finance, 2014, vol. 10, issue 1, 127-170

Abstract: We consider the problem of explicitly pricing and hedging an option written on a non-exchangeable asset when trading in a correlated asset is possible. This is a typical case of incomplete market where it is well known that the super-replication concept provides generally too high prices. We study several prices and in particular the instantaneous no-good-deal price (see Cochrane and Saa-Requejo in J Polit Econ 108(1):79–119, 2001 ) and the global one. We show numerically that the global no-good-deal price can be significantly higher that the instantaneous one. We then propose several hedging strategies and show numerically that the mean-variance hedging strategy can be efficient. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: No-good-deal; Basis risk; Mean variance hedging; C61; C63; G11; G13 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10436-013-0246-1

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