Arbitrage, Continuous Trading, and Margin Requirements

David C. Heath and Robert Jarrow ()
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David C. Heath: Department of Operations Research and Industrial Engineering, Cornell University, USA

Chapter 2 in Financial Derivatives Pricing:Selected Works of Robert Jarrow, 2008, pp 33-46 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of call options. In the context of the Black-Scholes economy, margin restrictions are shown to exclude continuous-trading arbitrage opportunities and, with two additional hypotheses, still to allow the Black-Scholes call model to apply. The Black-Scholes economy consists of a continuously traded stock with a price process that follows a geometric Brownian motion and a continuously traded bond with a price process that is deterministic.

Keywords: Derivatives; Options; Hedging; HJM; Black–Scholes; Forwards; Futures; Martingale Measure; Calls; Puts; Market Manipulation; Margin Requirements (search for similar items in EconPapers)
Date: 2008
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Journal Article: Arbitrage, Continuous Trading, and Margin Requirements (1987)
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