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The limitations of no-arbitrage arguments for real options

Hubalek, Friedrich and Schachermayer, Walter (1999) The limitations of no-arbitrage arguments for real options. Working Papers SFB "Adaptive Information Systems and Modelling in Economics and Management Science", 58. SFB Adaptive Information Systems and Modelling in Economics and Management Science, WU Vienna University of Economics and Business, Vienna.

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Abstract

We consider an option c which is contingent on an underlying (tilde S) that is not a traded asset. This situation typically arises in the context of real options. We investigate the situation when there is a "surrogate" traded asset S whose price process is highly correlated with that of (tilde S). An illustration would be the cases where S and (tilde S) model two different brands of crude oil. The main result of the paper shows that in this case one cannot draw any non-trivial conclusions on the price of the option by only using no arbitrage arguments. In a second step we try to isolate hedging strategies on the traded asset S which minimize the variance of the hedging error. We show in particular, that the naive strategy of simply replacing (tilde S) by S fails to be optimal and we are able to quantify how far it is from being optimal. (author's abstract)

Item Type: Paper
Keywords: Optionspreistheorie
Divisions: Departments > Informationsverarbeitung u Prozessmanag. > Produktionsmanagement > Taudes
Departments > Finance, Accounting and Statistics > Statistics and Mathematics
Departments > Marketing > Service Marketing und Tourismus
Departments > Informationsverarbeitung u Prozessmanag. > Informationswirtschaft
Depositing User: Repository Administrator
Date Deposited: 06 Mar 2002 15:45
Last Modified: 14 Sep 2010 23:54
URI: http://epub.wu.ac.at/id/eprint/110

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