Title: Option Pricing Model Based on Stochastic Optimal Control
Abstract: The assumption of constant underlying volatility in Black-Scholes formula cannot be satisfied in market. In this paper, we find the option price interval assuming the underlying volatility lies within a given interval. First we transform this financial problem to a stochastic optimal control problem, then obtain options' maximum and minimum price models through dynamic programming principle. We then discuss how to solve the nonlinear PDE model and how to narrow the price interval through optimal static hedging. We conclude this paper by giving its applications in U.S. A option market through McDonald's Crop options, comparing with Black-Scholes, and giving a method how to identify arbitrage opportunity in option markets.
Publication Year: 2013
Publication Date: 2013-12-07
Language: en
Type: article
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Cited By Count: 1
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