Option Pricing and Hedging Bounds in Incomplete Markets

Download or read book Option Pricing and Hedging Bounds in Incomplete Markets written by Tao Hao and published by . This book was released on 2009 with total page 14 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper has reviewed the literature on options pricing in incomplete markets. A tight upper and lower bounds can be derived based on the assumptions of mean and variance of the underlying asset price, not on its entire distribution. The differences between estimated upper or lower bounds and Black-Scholes price are quite small for deep in-the-money options, but can be very significant for deep out-of-the-money options. But at the same time, despite the wide pricing bounds, analysis of the implied hedging bounds suggests that the implications for asset allocation of incomplete markets are fairly limited.