Strategic option pricing

• Authors: Volker Bieta , Udo Broll , Wilfried Siebe

Abstracts

EN

In this paper an extension of the well-known binomial approach to option pricing is presented. The classical question is: What is the price of an option on the risky asset? The traditional answer is obtained with the help of a replicating portfolio by ruling out arbitrage. Instead a two-person game from the Nash equilibrium of which the option price can be derived is formulated. Consequently both the underlying asset’s price at expiration and the price of the option on this asset are endogenously determined. The option price derived this way turns out, however, to be identical to the classical no-arbitrage option price of the binomial model if the expiration-date prices of the underlying asset and the corresponding risk-neutral probability are properly adjusted according to the Nash equilibrium data of the game.

Keywords

EN

option pricing; game theory; Nash equilibrium

• Publisher: Uniwersytet Ekonomiczny w Poznaniu
• Journal: Economics and Business Review
• Year: 2020
• Volume: 6(20)
• Issue: 3
• Pages: 118-129

Contributors

author

Volker Bieta

author

Udo Broll

author

Wilfried Siebe

Identifiers

DOI

10.18559/ebr.2020.3.7

Biblioteka Nauki

1837957