On the hedging of options on exploding exchange rates

DOI10.1007/S00780-013-0218-3zbMATH Open1314.91205arXiv1202.6188OpenAlexW2110431828MaRDI QIDQ471173FDOQ471173

Authors: Peter Carr, Johannes Ruf, Travis Fisher 

Publication date: 14 November 2014

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: We study a novel pricing operator for complete, local martingale models. The new pricing operator guarantees put-call parity to hold for model prices and the value of a forward contract to match the buy-and-hold strategy, even if the underlying follows strict local martingale dynamics. More precisely, we discuss a change of num'eraire (change of currency) technique when the underlying is only a local martingale modelling for example an exchange rate. The new pricing operator assigns prices to contingent claims according to the minimal cost for superreplication strategies that succeed with probability one for both currencies as num'eraire. Within this context, we interpret the lack of the martingale property of an exchange-rate as a reflection of the possibility that the num'eraire currency may devalue completely against the asset currency (hyperinflation).

Full work available at URL: https://arxiv.org/abs/1202.6188

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zbMATH Keywords

foreign exchangechange of measureput-call parity[https://portal.mardi4nfdi.de/w/index.php?title=+Special%3ASearch&search=F%EF%BF%BD%EF%BF%BDllmer+measure&go=Go F��llmer measure]pricing operatorstrict local martingales

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Generalizations of martingales (60G48) Stochastic integrals (60H05) Applications of stochastic analysis (to PDEs, etc.) (60H30)

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Cited In (26)

• Convergence of local supermartingales
• Relative asset price bubbles
• Financial models with defaultable numéraires
• Minimal supersolutions for BSDEs with singular terminal condition and application to optimal position targeting
• Market Models with Optimal Arbitrage
• Scaled insurance cash flows: representation and computation via change of measure techniques
• Supermartingales as Radon-Nikodym densities and related measure extensions
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• A study on asset price bubble dynamics: explosive trend or quadratic variation?
• The existence of dominating local martingale measures
• Weak tail conditions for local martingales
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• Shifting martingale measures and the birth of a bubble as a submartingale
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• Stochastic exponentials and logarithms on stochastic intervals. A survey
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• Simplified calculus for semimartingales: multiplicative compensators and changes of measure
• Risk measures for processes and BSDEs
• A mathematical theory of financial bubbles
• Implied volatility in strict local martingale models
• A new kind of augmentation of filtrations suitable for a change of probability measure by a strict local martingale
• Filtration shrinkage, strict local martingales and the Föllmer measure
• Strict local martingales and bubbles
• A risk-neutral equilibrium leading to uncertain volatility pricing
• Heterogeneous expectations, currency options and the euro/dollar

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