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Title
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Valuation of exotic options under shortselling constraints
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Author
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Abstract
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| 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. |
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Language
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English
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Source (journal)
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Finance and stochastics. - Berlin
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Publication
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Berlin
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2002
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ISSN
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0949-2984
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DOI
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10.1007/S007800100050
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Volume/pages
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6
:2
(2002)
, p. 143-172
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ISI
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000178721200001
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Full text (Publisher's DOI)
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Full text (publisher's version - intranet only)
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