Pricing and Hedging Basis Risk under No Good Deal Assumption
نویسندگان
چکیده
We consider the problem of explicitly pricing and hedging an option written on a nonexchangeable asset when trading in a correlated asset is possible. This is a typical case of incomplete market where it is well known that the super-replication concept provides generally too high prices. Here, following J.H. Cochrane and J. Saá-Requejo, we study valuation under No Good Deal (NGD) Assumption. First, we clarify the notion of NGD. Then we compute a lower and an upper bound for NGD price and show numerically that it can be significatively higher that the one previously compute in the literature. We then propose several hedging strategies starting from NGD price and show numerically that the minimum variance one is quite efficient.
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