Munich Personal RePEc Archive

On the pricing and hedging of options for highly volatile periods

El-Khatib, Youssef and Hatemi-J, Abdulnasser (2013): On the pricing and hedging of options for highly volatile periods.

[img]
Preview
PDF
MPRA_paper_45272.pdf

Download (362kB) | Preview

Abstract

Option pricing is an integral part of modern financial risk management. The well-known Black and Scholes (1973) formula is commonly used for this purpose. This paper is an attempt to extend their work to a situation in which the unconditional volatility of the original asset is increasing during a certain period of time. We consider a market suffering from a financial crisis. We provide the solution for the equation of the underlying asset price as well as finding the hedging strategy. In addition, a closed formula of the pricing problem is proved for a particular case. The suggested formulas are expected to make the valuation of options and the underlying hedging strategies during financial crisis more precise.

Logo of the University Library LMU Munich
MPRA is a RePEc service hosted by
the University Library LMU Munich in Germany.