On the hedging of options on exploding exchange rates (Q471173): Difference between revisions
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Property / author: Travis C. Fisher / rank | |||
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Property / author: Travis C. Fisher / rank | |||
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The authors propose to modify the notion of a contingent claim price in the setting where the source of uncertainty is a strict local martingale rather than a martingale. They propose to use the minimal cost for superreplicating a given contingent claim under two probability measures simultaneously as a pricing operator for contingent claims. The main result provides a formula for the minimum joint superreplication cost in a complete market. This approach restores a put-call parity and international put-call equivalence for model prices. The novelty is a rigorous justification of the pricing formula as a hedging cost. As to the mathematical tools, the Föllmer measure for nonnegative local martingales is constructed extending the corresponding results for strictly positive local martingales. A stochastic calculus for the suggested change of measure is developed in which neither measure dominates the other one. The authors' approach uses two numéraires simultaneously, which requires to introduce the notions of market completeness and superreplication. Numerous examples are provided. | |||
Property / review text: The authors propose to modify the notion of a contingent claim price in the setting where the source of uncertainty is a strict local martingale rather than a martingale. They propose to use the minimal cost for superreplicating a given contingent claim under two probability measures simultaneously as a pricing operator for contingent claims. The main result provides a formula for the minimum joint superreplication cost in a complete market. This approach restores a put-call parity and international put-call equivalence for model prices. The novelty is a rigorous justification of the pricing formula as a hedging cost. As to the mathematical tools, the Föllmer measure for nonnegative local martingales is constructed extending the corresponding results for strictly positive local martingales. A stochastic calculus for the suggested change of measure is developed in which neither measure dominates the other one. The authors' approach uses two numéraires simultaneously, which requires to introduce the notions of market completeness and superreplication. Numerous examples are provided. / rank | |||
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Property / reviewed by | |||
Property / reviewed by: Yuliya S. Mishura / rank | |||
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Property / Mathematics Subject Classification ID | |||
Property / Mathematics Subject Classification ID: 91G20 / rank | |||
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Property / Mathematics Subject Classification ID | |||
Property / Mathematics Subject Classification ID: 60G48 / rank | |||
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Property / Mathematics Subject Classification ID | |||
Property / Mathematics Subject Classification ID: 60H05 / rank | |||
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Property / Mathematics Subject Classification ID | |||
Property / Mathematics Subject Classification ID: 60H30 / rank | |||
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Property / zbMATH DE Number | |||
Property / zbMATH DE Number: 6369501 / rank | |||
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Property / zbMATH Keywords | |||
strict local martingales | |||
Property / zbMATH Keywords: strict local martingales / rank | |||
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Property / zbMATH Keywords | |||
put-call parity | |||
Property / zbMATH Keywords: put-call parity / rank | |||
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Föllmer measure | |||
Property / zbMATH Keywords: Föllmer measure / rank | |||
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Property / zbMATH Keywords | |||
change of measure | |||
Property / zbMATH Keywords: change of measure / rank | |||
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foreign exchange | |||
Property / zbMATH Keywords: foreign exchange / rank | |||
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pricing operator | |||
Property / zbMATH Keywords: pricing operator / rank | |||
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Property / MaRDI profile type | |||
Property / MaRDI profile type: MaRDI publication profile / rank | |||
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Property / OpenAlex ID | |||
Property / OpenAlex ID: W2110431828 / rank | |||
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Property / arXiv ID | |||
Property / arXiv ID: 1202.6188 / rank | |||
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Property / cites work | |||
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links / mardi / name | links / mardi / name | ||
Latest revision as of 06:45, 9 July 2024
scientific article
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English | On the hedging of options on exploding exchange rates |
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On the hedging of options on exploding exchange rates (English)
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14 November 2014
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The authors propose to modify the notion of a contingent claim price in the setting where the source of uncertainty is a strict local martingale rather than a martingale. They propose to use the minimal cost for superreplicating a given contingent claim under two probability measures simultaneously as a pricing operator for contingent claims. The main result provides a formula for the minimum joint superreplication cost in a complete market. This approach restores a put-call parity and international put-call equivalence for model prices. The novelty is a rigorous justification of the pricing formula as a hedging cost. As to the mathematical tools, the Föllmer measure for nonnegative local martingales is constructed extending the corresponding results for strictly positive local martingales. A stochastic calculus for the suggested change of measure is developed in which neither measure dominates the other one. The authors' approach uses two numéraires simultaneously, which requires to introduce the notions of market completeness and superreplication. Numerous examples are provided.
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strict local martingales
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put-call parity
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Föllmer measure
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change of measure
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foreign exchange
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pricing operator
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