Skip to Main content Skip to Navigation
Preprints, Working Papers, ...

Pricing and Hedging Basis Risk under No Good Deal Assumption

Abstract : We consider the problem of pricing and hedging an option written on a non-exchangeable asset when trading in a correlated asset is possible. This is a typical case of incomplete market where it is well known that the super-replication concept provides generally too high prices. Here, following J.H. Cochrane and J. Saá-Requejo, we study valuation under No Good Deal (NGD) Assumption. First, we clarify the notion of NGD for dynamic strategies, compute a lower and an upper bound and prove that in fact NGD price can be strictly higher that the one previously compute in the literature. We also propose a hedging strategy by imposing criterium on the variance of the replication's error. Finally, we provide various numerical illustrations showing the efficiency of NGD pricing and hedging.
Complete list of metadata

Cited literature [20 references]  Display  Hide  Download
Contributor : Emmanuel Temam <>
Submitted on : Tuesday, July 19, 2011 - 11:55:39 AM
Last modification on : Wednesday, December 9, 2020 - 3:15:03 PM
Long-term archiving on: : Monday, December 5, 2016 - 12:43:38 AM


Files produced by the author(s)


  • HAL Id : hal-00498479, version 3


Laurence Carassus, Emmanuel Temam. Pricing and Hedging Basis Risk under No Good Deal Assumption. 2010. ⟨hal-00498479v3⟩



Record views


Files downloads