Title
Valuation of exotic options under shortselling constraints Valuation of exotic options under shortselling constraints
Author
Faculty/Department
Faculty of Sciences. Mathematics and Computer Science
Publication type
article
Publication
Berlin ,
Subject
Economics
Mathematics
Source (journal)
Finance and stochastics. - Berlin
Volume/pages
6(2002) :2 , p. 143-172
ISSN
0949-2984
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Abstract
Options with discontinuous payoffs are generally traded above their theoretical BlackScholes prices because of the hedging difficulties created by their large delta and gamma values. A theoretical method for pricing these options is to constrain the hedging portfolio and incorporate this constraint into the pricing by computing the smallest initial capital which permits super-replication of the option. We develop this idea for exotic options, in which case the pricing problem becomes one of stochastic control. Our motivating example is a call which knocks out in the money, and explicit formulas for this and other instruments are provided.
E-info
https://repository.uantwerpen.be/docman/iruaauth/06096a/d42595b3201.pdf