Option Pricing Model for Incomplete Market
Statistical Mechanics
2016-08-31 v2 Pricing of Securities
Abstract
The problem of determining the European-style option price in the incomplete market has been examined within the framework of stochastic optimization. An analytic method based on the discrete dynamic programming equation (Bellman equation) has been developed that gives the general formalism for determining the option price and the optimal trading strategy (optimal control policy) that reduces total risk inherent in writing the option. The basic purpose of paper is to present an effective algorithm that can be used in practice. Keywords: option pricing, incomplete market, transaction costs, stochastic optimization, Bellman equation.
Keywords
Cite
@article{arxiv.cond-mat/9807397,
title = {Option Pricing Model for Incomplete Market},
author = {Sergei Fedotov and Sergei Mikhailov},
journal= {arXiv preprint arXiv:cond-mat/9807397},
year = {2016}
}