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Black-Scholes theory for an underlying with multiple attractors

[journal article]

Herzberg, Frederik

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Abstract A valuation theory for derivatives on an underlying that is subject to multiple attractors is proposed, the economic justification being attraction-adjusted hedging. In non-critical regions -- outside the boundaries of the attractor regions -- a European option price can be viewed as a derivative on an underlying with a mean-reverting law, such as a commodity price, however with a different payoff function.
Classification Basic Research, General Concepts and History of Economics; Economic Statistics, Econometrics, Business Informatics
Method theory application
Free Keywords Imperfections; Derivatives Pricing; Modelling Asset Price Dynamics; Nonequilibrium Systems
Document language English
Publication Year 2008
Page/Pages p. 453-457
Journal Quantitative Finance, 8 (2008) 5
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)