Perfect option hedging for a large trader
RØdiger Frey ()
Additional contact information
RØdiger Frey: Department of Mathematics, ETH ZØrich, ETH-Zentrum, CH-8092 ZØrich, Switzerland
Finance and Stochastics, 1998, vol. 2, issue 2, 115-141
Standard derivative pricing theory is based on the assumption of agents acting as price takers on the market for the underlying asset. We relax this hypothesis and study if and how a large agent whose trades move prices can replicate the payoff of a derivative security. Our analysis extends prior work of Jarrow to economies with continuous security trading. We characterize the solution to the hedge problem in terms of a nonlinear partial differential equation and provide results on existence and uniqueness of this equation. Simulations are used to compare the hedging strategies in our model to standard Black-Scholes strategies.
Keywords: Option pricing; Black-Scholes model; hedging; large trader; feedback effects (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Note: received: April 1996; final version received: April 1997
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43) Track citations by RSS feed
Downloads: (external link)
http://link.springer.de/link/service/journals/0078 ... 02002/80020115.ps.gz (application/postscript)
Access to the full text of the articles in this series is restricted
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:spr:finsto:v:2:y:1998:i:2:p:115-141
Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2
Access Statistics for this article
Finance and Stochastics is currently edited by M. Schweizer
More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla ().