Benchmark-Neutral Pricing
Mathematical Finance
2024-07-03 v1
Abstract
The paper introduces benchmark-neutral pricing and hedging for long-term contingent claims. It employs the growth optimal portfolio of the stocks as numeraire and the new benchmark-neutral pricing measure for pricing. For a realistic parsimonious model, this pricing measure turns out to be an equivalent probability measure, which is not the case for the risk-neutral pricing measure. Many risk-neutral prices of long-term contracts are more expensive than necessary. Benchmark-neutral pricing identifies the minimal possible prices of contingent claims, which is illustrated with remarkable accuracy for a long-term zero-coupon bond.
Keywords
Cite
@article{arxiv.2407.01542,
title = {Benchmark-Neutral Pricing},
author = {Eckhard Platen},
journal= {arXiv preprint arXiv:2407.01542},
year = {2024}
}