Questions tagged [no-arbitrage-theory]
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7
questions
12
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7answers
3k views
What is the fair price of this option?
Without having to use Black-Scholes, how do I price this option using a basic no-arbitrage argument?
Question
Assume zero interest rate and a stock with current price at \$$1$ that pays no dividend. ...
8
votes
2answers
3k views
Arbitrage Free Volatility Smile
When ATM implied volatility is higher than OTM put and call I believe that the volatility smile is no longer arbitrage free? Why is that?
On the other hand, when ATM implied volatility is lower than ...
7
votes
1answer
2k views
Arbitragefree Pricing: Q vs. P
I read that the Fundamental Theorem of Asset Pricing states, that a market is arbitrage-free if and only if there exists an equivalent martingale measure Q, under which the discounted asset price ...
3
votes
2answers
529 views
Dumb question: is risk-neutral pricing taking conditional expectation?
Dumb question: is risk-neutral pricing taking conditional expectation? $\tag{1}$
In trying to recall intuition for risk-neutral pricing, I think I read that we should price derivatives risk-neutrally ...
8
votes
1answer
216 views
FTAP a-la Harrison, Kreps and Pliska
I was reading the papers co-authored by Harrison, Kreps and Pliska, that initiated the formal research on the connection between pricing, martingale measures, arbitrage and completeness. I have some ...
1
vote
3answers
2k views
Arbitrage free implies complete market?
In Tomas Björk's Arbitrage Theory in Continuous Time (or here), $\exists$ this proposition
It seems that to show that the model is complete, we must show that the claims are reachable. That is, we ...
5
votes
2answers
642 views
Pricing when arbitrage is possible through Negative Probabilities or something else
Assume that we have a general one-period market model consisting of $d+1$ assets and $N$ states.
Using a replicating portfolio $\phi$, determine $\Pi(0;X)$, the price of a European call option, with ...
