Understanding option prices

Ajay Khanna and Dilip Madan

Quantitative Finance, 2004, vol. 4, issue 1, 55-63

Abstract: This paper follows the insights of Black and Scholes (1973 J. Political Economy 81 637-54) and Merton (1973 Bell J. Economics Management Sci. 4 141-83) in contexts where their conclusions cannot be exactly obtained. Specifically, we consider an infinite activity Levy process with no continuous martingale component driving the stock and address the issue of determining capital requirements permitting sufficient time diversification to the option writer. A new framework for pricing options results. Model prices are shown to be potentially consistent with market observations on observed premia. We note that the advance by Rogers (2000 J. Appl. Probability 37 1173-80) on first passage probabilities for spectrally one-sided processes makes the current analysis tractable.

Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1088/1469-7688/4/1/005 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:4:y:2004:i:1:p:55-63

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1088/1469-7688/4/1/005

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().