Collectively Fluctuating Assets in the Presence of Arbitrage Opportunities and Option Pricing

10 Pages Posted: 2 Feb 1999

Date Written: April 3, 1997

Abstract

Methods of functional analysis are applied to describe collectively fluctuating default-free pure discount bonds subject to trading-related noise which generates arbitrage opportunities. Two key elements of the model are: (i) the naturally incorporated fixed bond price at maturity which is achieved by making use of only those fluctuating parts of price motion which terminate at a specified final condition, and (ii) the most attractive arbitrage opportunities between bonds with close maturities, with modeled a local linear approximation. The Black-Scholes equation for contingent claims is derived, and a connection with the conventional methods of option valuation is indicated.

See also a related paper by A.N.Adamchuk, S.Adamchuk and S.E.Esipov "Arbitrage Relaxation of Instruments with Temporal Constraints"

Note: For journal readers: A related paper is available at the URL which follows this abstract. It is written in html. Cut and paste beginning with http:// and ending with the 5-digit number.

JEL Classification: E43, G12, G13, C15

Suggested Citation

Adamchuk, Alexander and Esipov, Sergei, Collectively Fluctuating Assets in the Presence of Arbitrage Opportunities and Option Pricing (April 3, 1997). Available at SSRN: https://ssrn.com/abstract=142893 or http://dx.doi.org/10.2139/ssrn.142893

Alexander Adamchuk (Contact Author)

NAFT

Chicago, IL
United States

Sergei Esipov

Quant Isle Ltd. ( email )

United States

HOME PAGE: http://www.quant-isle.com

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