2013/04/17 by Youssef El-Khatib, Abdulnasser Hatemi-J, El-Khatib, Youssef +1
Economics, Econometrics and Finance · #60J60 #91B25 #91G20 #FOS: Economics and business #Pricing of Securities (q-fin.PR) #msc:60J60 #msc:91B25 #msc:91G20 #q-fin.PR
paper · pdf · doi:10.48550/arxiv.1304.4688
arxiv created 2013/04/17 · arxiv updated 2013/04/18
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. This paper is an attempt to extend their work to a situation in which the unconditional volatility of the original asset is increasing during a certain period of time. We consider a market suffering from a financial crisis. We 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. The suggested formulas are expected to make the valuation of options and the underlying hedging strategies during financial crisis more precise.