On the pricing and hedging of options for highly volatile periods
Pricing of Securities
2013-04-18 v1
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.
Keywords
Cite
@article{arxiv.1304.4688,
title = {On the pricing and hedging of options for highly volatile periods},
author = {Youssef El-Khatib and Abdulnasser Hatemi-J},
journal= {arXiv preprint arXiv:1304.4688},
year = {2013}
}