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Volume 6 (20) Number 3 pp. 118-129

Volker Bieta1, Udo Broll2, Wilfried Siebe3

1Technische Universität Dresden, Dresden, Germany.
Center of International Studies (ZIS), Technische Universität Dresden, Dresden, Germany.
Universität 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.

pub/2020_3_118.pdf Full text available in in Adobe Acrobat format:
Keywords: option pricing, game theory, Nash equilibrium

DOI: 10.18559/ebr.2020.3.7

For citation:

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