On the hedging of options on exploding exchange rates

DOI10.1007/S00780-013-0218-3MaRDI QIDQ471173zbMATH OpenOpenAlexFDO

Authors Peter Carr, Johannes Ruf, Travis Fisher

Publication date 14 November 2014

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

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

zbMATH Keywords

foreign exchangechange of measureput-call paritypricing operatorstrict local martingalesFöllmer measure

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)

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).

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Cited in

(26)

• Relative asset price bubbles
• Convergence of local supermartingales
• Minimal supersolutions for BSDEs with singular terminal condition and application to optimal position targeting
• Financial models with defaultable numéraires
• 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
• On the martingale property in stochastic volatility models based on time-homogeneous diffusions
• The existence of dominating local martingale measures
• A study on asset price bubble dynamics: explosive trend or quadratic variation?
• Weak tail conditions for local martingales
• Robust pricing and hedging under trading restrictions and the emergence of local martingale models
• Strict local martingales and the Khasminskii test for explosions
• Shifting martingale measures and the birth of a bubble as a submartingale
• Negative call prices
• Stochastic exponentials and logarithms on stochastic intervals. A survey
• Polynomial diffusions and applications in finance
• Simplified calculus for semimartingales: multiplicative compensators and changes of measure
• Risk measures for processes and BSDEs
• A mathematical theory of financial bubbles
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• Strict local martingales and bubbles
• A risk-neutral equilibrium leading to uncertain volatility pricing
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