Volume 6 (20) Number 3 pp. 118-129
Volker Bieta1, Udo Broll2, Wilfried Siebe3
2Center of International Studies (ZIS), Technische Universität Dresden, Dresden, Germany.
3Universität Rostock, Rostock, Germany.
Strategic option pricing
In this paper an extension of the well-known binomial approach to option
pricing is presented. The classical question is: What is the price of an option on the
risky asset? The traditional answer is obtained with the help of a replicating portfolio
by ruling out arbitrage. Instead a two-person game from the Nash equilibrium of which
the option price can be derived is formulated. Consequently both the underlying asset’s
price at expiration and the price of the option on this asset are endogenously determined.
The option price derived this way turns out, however, to be identical to the
classical no-arbitrage option price of the binomial model if the expiration-date prices
of the underlying asset and the corresponding risk-neutral probability are properly
adjusted according to the Nash equilibrium data of the game.
Keywords: option pricing, game theory, Nash equilibrium
|MLA||Bieta, Volker, et al. "Strategic option pricing." Economics and Business Review EBR 20.3 (2020): 118-129. DOI: 10.18559/ebr.2020.3.7|
|APA||Bieta1, V., Broll2, U., & Siebe3, W. (2020). Strategic option pricing. Economics and Business Review EBR 20(3), 118-129 DOI: 10.18559/ebr.2020.3.7|
|ISO 690||BIETA, Volker, BROLL, Udo, SIEBE, Wilfried. Strategic option pricing. Economics and Business Review EBR, 2020, 20.3: 118-129. DOI: 10.18559/ebr.2020.3.7|