Expected gain-loss pricing and hedging of contingent claims in incomplete markets by linear programming
Author
Pınar, M. Ç.
Salih, A.
Camcı, A.
Date
2010Source Title
European Journal of Operational Research
Print ISSN
0377-2217
Electronic ISSN
1872-6860
Publisher
Elsevier
Volume
201
Issue
3
Pages
770 - 785
Language
English
Type
ArticleItem Usage Stats
145
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481
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Abstract
We analyze the problem of pricing and hedging contingent claims in the multi-period, discrete time, discrete state case using the concept of a "λ gain-loss ratio opportunity". Pricing results somewhat different from, but reminiscent of, the arbitrage pricing theorems of mathematical finance are obtained. Our analysis provides tighter price bounds on the contingent claim in an incomplete market, which may converge to a unique price for a specific value of a gain-loss preference parameter imposed by the market while the hedging policies may be different for different sides of the same trade. The results are obtained in the simpler framework of stochastic linear programming in a multi-period setting, and have the appealing feature of being very simple to derive and to articulate even for the non-specialist. They also extend to markets with transaction costs.
Keywords
Contingent claimHedging
Martingales
Pricing
Stochastic linear programming
Transaction costs
Contingent claim
Hedging
Martingales
Pricing
Stochastic linear programming
Transaction costs
Commerce
Dynamic programming
Linear programming
Linearization
Optimization
Costs
Permalink
http://hdl.handle.net/11693/22388Published Version (Please cite this version)
http://dx.doi.org/10.1016/j.ejor.2009.02.031Collections
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