Risk-Neutrality of RND and Option Pricing within an Entropy Framework

This article constructs an entropy pricing framework by incorporating a set of informative risk-neutral moments (RNMs) extracted from the market-available options as constraints. Within the RNM-constrained entropic framework, a unique distribution close enough to the correct one is obtained, and its risk-neutrality is deeply verified based on simulations. Using this resultant risk-neutral distribution (RND), a sample of risk-neutral paths of the underlying price is generated and ultimately the European option’s prices are computed. The pricing performance and analysis in simulations demonstrate that this proposed valuation is comparable to the benchmarks and can produce fairly accurate prices for options.

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Valuation of Default Risks in Percentage Leases in Option Pricing Framework

10.15396/eres2003_157 ◽

2003 ◽

Keyword(s):

Option Pricing ◽

Default Risks ◽

Pricing Framework

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Risk-Neutral and Physical Jumps in Option Pricing

SSRN Electronic Journal ◽

10.2139/ssrn.1099368 ◽

2007 ◽

Author(s):

Jian Chen ◽

Xiaoquan Liu ◽

Chenghu Ma

Keyword(s):

Option Pricing ◽

Risk Neutral

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Existence of Maximum Entropy Problem Solution in a General N-Dimensional Case

Mathematical Problems of Computer Science ◽

10.51408/1963-0012 ◽

2018 ◽

pp. 97-102

Author(s):

Ruben Gevorgyan ◽

Narek Margaryan

Keyword(s):

Option Pricing ◽

Maximum Entropy ◽

Optimization Algorithms ◽

Dimensional Case ◽

Computational Time ◽

Problem Solution ◽

Call Options ◽

Price Range ◽

Risk Neutral ◽

Pricing Formula

In the following paper, we will define conditions, which need to be satisfied in order for the maximum entropy problem applied in European call options to have a solution in a general n-dimensional case. We will also find a minimum right boundary for the price range in order to have at least one risk neutral measure satisfying the option pricing formula. The results significantly reduce the computational time of optimization algorithms used in maximum entropy problem.

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On Market Completions Approach to Option Pricing

Review of Business and Economics Studies ◽

10.26794/2308-944x-2021-9-3-77-93 ◽

2021 ◽

Vol 9 (3) ◽

pp. 77-93

Author(s):

I. Vasilev ◽

A. Melnikov

Keyword(s):

Option Pricing ◽

Incomplete Markets ◽

Option Price ◽

Optimal Investment ◽

Market Model ◽

Option Prices ◽

End Points ◽

Hedging Strategies ◽

Risk Neutral ◽

Interesting Approach

Option pricing is one of the most important problems of contemporary quantitative finance. It can be solved in complete markets with non-arbitrage option price being uniquely determined via averaging with respect to a unique risk-neutral measure. In incomplete markets, an adequate option pricing is achieved by determining an interval of non-arbitrage option prices as a region of negotiation between seller and buyer of the option. End points of this interval characterise the minimum and maximum average of discounted pay-off function over the set of equivalent risk-neutral measures. By estimating these end points, one constructs super hedging strategies providing a risk-management in such contracts. The current paper analyses an interesting approach to this pricing problem, which consists of introducing the necessary amount of auxiliary assets such that the market becomes complete with option price uniquely determined. One can estimate the interval of non-arbitrage prices by taking minimal and maximal price values from various numbers calculated with the help of different completions. It is a dual characterisation of option prices in incomplete markets, and it is described here in detail for the multivariate diffusion market model. Besides that, the paper discusses how this method can be exploited in optimal investment and partial hedging problems.

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