Boundary Conditions of Options: A Demonstration Based on the Stochastic Discount

Salvador Cruz Rambaud and Pérez Ana María Sánchez
Additional contact information
Pérez Ana María Sánchez: Departamento de Economía y Empresa, University of Almería Ctra. Sacramento, 04120. La Cañada de San Urbano, Almería, Spain

Mediterranean Journal of Social Sciences, 2017, vol. 8, issue 1, 46-57

Abstract: The aim of this paper is to provide a proof of the generally accepted boundary conditions of (call and put) financial options from a novel point of view. To do this, we will use an auxiliary discounting function which will be defined in this work. However, the financial options are derivative instruments whose function is risk hedging in contexts of uncertainty, whereby the employed discount function will be necessarily stochastic. More specifically, we will apply the classic properties of the magnitude “discount” to the so-defined discount function to obtain, in a natural way, the noteworthy boundary conditions of financial options. It is well-known that financial options (belonging to the field of stochastic finance) have been studied without any relation with the magnitude “discount” (more characteristic of the classic Financial Mathematics). Consequently, the principal contribution of this work is the construction of a stochastic discount function as a bridge connecting its associated discount and the financial options, being demonstrated that their properties can be mutually derived.

Keywords: Finance; boundary conditions; call option; put option; stochastic discount function (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.5901/mjss.2017.v8n1p46 (text/html)

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:vrs:mjsosc:v:8:y:2017:i:1:p:46-57:n:56

DOI: 10.5901/mjss.2017.v8n1p46

Access Statistics for this article

Mediterranean Journal of Social Sciences is currently edited by Alessandro Figus

More articles in Mediterranean Journal of Social Sciences from Sciendo
Bibliographic data for series maintained by Peter Golla ().