Option pricing for large agents

Mattias Jonsson and Jussi Keppo

Applied Mathematical Finance, 2002, vol. 9, issue 4, 261-272

Abstract: This paper considers arbitrage-free option pricing in the presence of large agents. These large agents have a significant market power, and their trading strategies influence the dynamics of the financial asset prices. First, a simple asset pricing model in the presence of large agents is presented. Then a nonlinear partial differential equation is found for the prices of European options in the model. The unit option price depends on the large agent's asset holdings. Finally, a game model is introduced for the interaction between different market players. In this game, the outstanding number of options, as well as the option price, is found as a Nash equilibrium.

Date: 2002
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DOI: 10.1080/1350486022000025471

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