Real-world options: smile and residual risk
نویسنده
چکیده
We present a theory of option pricing and hedging, designed to address non-perfect arbitrage, market friction and the presence of ‘fat’ tails. An implied volatility ‘smile’ is predicted. We give precise estimates of the residual risk associated with optimal (but imperfect) hedging. Accepted for publication in Risk Magazine (December 1995).
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