LSE OPERATIONAL RESEARCH DEPARTMENT: RESEARCH SEMINAR
Wednesday October 17, 2001, 5.00pm - 6.00pm
Room S78, St Clement's building: see
http://www.lse.ac.uk/School/maps/map1.htm and
http://www.lse.ac.uk/School/maps/map3.htm
" 'Risk-free' Trading and Option Pricing"
Peter Whittle FRS, University of Cambridge
Despite its subject, the seminar assumes no prior knowledge of financial
mathematics or Black-Scholes theory. Some appeal is made to dynamic
programming.
The thinking behind the original Black-Scholes formula is criticised on the
grounds that it holds out the quite unrealistic prospect of risk-free
operation, that it can sacrifice asset-maximisation to exact meeting of the
contract, and that it restricts investment to those stocks on which an
option is being sold. An alternative approach is given, based on a model of
risk-averse asset-maximisation, which, while meeting these criticisms, gives
the option price in the familiar form of a discounted and weighted
conditional expectation of the seller's liability at maturity. This
evaluation is extended to a completely general stochastic model of stock
price evolution; consideration is also given to the possibility of seller's
ruin.
*( Refreshments after the seminar in the Operational Research Department ) *
Dr Peter Sozou
Department of Operational Research
London School of Economics
Houghton Street, London WC2A 2AE
tel: 020 7955-6234(direct) / 7955-7653(admin)
fax: 020 7955-6885 email: [log in to unmask]
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