TY - JOUR
T1 - Option valuation and hedging in markets with a crunch
AU - El-Khatib, Youssef
AU - Hatemi-J, Abdulnasser
N1 - Funding Information:
JEL Classification — C06, G01, G11, G12, G13 This paper was partially funded by the UAE University (Grant No. 31B028).
Publisher Copyright:
© 2017, © Emerald Publishing Limited.
PY - 2017
Y1 - 2017
N2 - 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.
AB - 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.
KW - Black and Scholes formula
KW - Financial crisis
KW - Options pricing and hedging
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U2 - 10.1108/JES-04-2016-0083
DO - 10.1108/JES-04-2016-0083
M3 - Article
AN - SCOPUS:85029814054
SN - 0144-3585
VL - 44
SP - 801
EP - 815
JO - Journal of Economic Studies
JF - Journal of Economic Studies
IS - 5
ER -