Abstract
Purpose: Option pricing is an integral part of modern financial risk management. The well-known Black and Scholes (1973) formula is commonly used for this purpose. The purpose of this paper is to extend their work to a situation in which the unconditional volatility of the original asset is increasing during a certain period of time. Design/methodology/approach: The authors consider a market suffering from a financial crisis. The authors provide the solution for the equation of the underlying asset price as well as finding the hedging strategy. In addition, a closed formula of the pricing problem is proved for a particular case. Furthermore, the underlying price sensitivities are derived. Findings: The suggested formulas are expected to make the valuation of options and the underlying hedging strategies during a financial crisis more precise. A numerical application is provided for determining the premium for a call and a put European option along with the underlying price sensitivities for each option. Originality/value: An alternative option pricing model is introduced that performs better than existing ones, especially during a financial crisis.
Original language | English |
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Pages (from-to) | 801-815 |
Number of pages | 15 |
Journal | Journal of Economic Studies |
Volume | 44 |
Issue number | 5 |
DOIs | |
Publication status | Published - 2017 |
Keywords
- Black and Scholes formula
- Financial crisis
- Options pricing and hedging
ASJC Scopus subject areas
- General Economics,Econometrics and Finance