If the underlying asset price process is unknown, arbitrageurs may not have sufficient incentive and confidence to use the underlying asset to arbitrage options. The option market makers can hedge their portfolios of temporary option inventories without the underlying asset, but investors’ risk attitudes and heterogeneous expectations could become relevant to option pricing. This paper shows th...

We consider option hedging and pricing for a large agent. The large agent affects the market’s demand-supply equilibrium and, therefore, the market prices of financial instruments. By assuming a specific large agent’s effect function for the underlying asset we derive the corresponding effect function for call options on that asset. As we show, the price of a call option in our model is the sol...

We consider option hedging and pricing for a large agent. The large agent affects the market’s demand-supply equilibrium and, therefore, the market prices of financial instruments. By assuming a specific large agent’s effect function for the underlying asset we derive the corresponding effect function for call options on that asset. As we show, the price of a call option in our model is the sol...

This paper examines how an option plan that rewards managers for firm performance relative to some market or industry benchmark should be structured, and gauges the deadweight costs of such a plan. Relative-performance-based compensation advocates contend that conventional stock options do not adequately discriminate between strong and weak managers, typically suggesting “indexed options,” that...

The paper deals with the problem of optimal behavior of an investor in the option market with own opinion on market properties. We tell the difference between investor's and market probability distribution functions of future prices of underlier. In this case, the investor might gain in the average income. If the investor, however, is guided by the presently popular Value-at-Risk criterion in t...

Alternative strategies for predicting stock market volatility are examined. In out-of-sample forecasting experiments implied-volatility information, derived from contemporaneously observed option prices or history-based volatility predictors, such as GARCH models, are investigated, to determine if they are more appropriate for predicting future return volatility. Employing German DAX-index retu...

We analyze a dynamic market in which buyers compete in a sequence of auctions for common value or differentiated goods. New buyers and objects may arrive at random times. Since objects are imperfect substitutes, buyers’ private values are not persistent. Instead, buyers receive new signals or draw new values in each period. We consider the use of second-price auctions for selling these objects....

This paper examines how an option plan that rewards managers for firm performance relative to some market or industry benchmark should be structured, and gauges the deadweight costs of such a plan. Relative-performance-based compensation advocates contend that conventional stock options do not adequately discriminate between strong and weak managers, typically suggesting “indexed options,” that...