Real-world options: smile and residual risk

Bouchaud, J-P., Iori, G. & Sornette, D. (1995). Real-world options: smile and residual risk. Risk, 9(3), pp. 61-63.

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Abstract

We present a theory of option pricing and hedging, designed to address non-perfect arbitrage, market friction and the presence of `fat' tails. An implied volatility `smile' is predicted. We give precise estimates of the residual risk associated with optimal (but imperfect) hedging.

Item Type: Article
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Divisions: School of Social Sciences > Department of Economics
URI: http://openaccess.city.ac.uk/id/eprint/14608

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