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.
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https://hal.archives-ouvertes.fr/hal-00498479
Contributeur : Emmanuel Temam <>
Soumis le : mardi 19 juillet 2011 - 11:55:39
Dernière modification le : mercredi 12 octobre 2016 - 01:14:25
Document(s) archivé(s) le : lundi 5 décembre 2016 - 00:43:38

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  • HAL Id : hal-00498479, version 3

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

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