Standard derivative pricing theory is based on the assumption of agents acting as price takers on the market for the underlying asset. We relax this hypothesis and study if and how a large agent whose trades move prices can replicate the payoff of a derivative security. Our analysis extends...

A passport option, as introduced and marketed by Bankers Trust, is a call option on the balance of a trading account. The strategy that this account follows is chosen by the option holder, subject to position limits. <p>We derive a simplified form for the price of the passport option using local...</p>

This paper considers the problem of pricing discrete barrier options. A discrete barrier option is a barrier option where the barrier is monitored only at specific dates. This paper continues the work initiated by Broadie et al. in [B-G-K] and determine formulas to estimate the price of discrete...

By extending the GARCH option pricing model of Duan (1995) to more flexible volatility estimation it is shown that the prices of out-of-the-money options strongly depend on volatility features such as asymmetry. Results are provided for the properties of the stationary pricing distribution in...

For a Markov process $x_t$, the forward measure $P^T$ over the time interval $[0,T]$ is defined by the Radon-Nikodym derivative $dP^T/dP = M\exp(-\int_0^Tc(x_s)ds)$, where $c$ is a given non-negative function and $M$ is the normalizing constant. In this paper, the law of $x_t$ under the forward...

We extend the short rate model of Vasicek (1977) to include jumps in the local mean. Conditions ensuring existence of a unique equivalent martingale measure are given, implying that the model is arbitrage-free and complete. We develop efficient numerical methods for computation of zero coupon...

The paper shows that in the presence of transaction costs, there exists a viable price system in which prices of call options are arbitrarily close to the price of the stock. The construction of such an example is possible no matter how small the volatility of the stock or how small the...

This paper discusses a new approach to contingent claim valuation in general incomplete market models. We determine the neutral derivative price which occurs if investors maximize their local utility and if derivative demand and supply are balanced. We also introduce the sensitivity process of a...

We analyze the joint convergence of sequences of discounted stock prices and Radon-Nicodym derivatives of the minimal martingale measure when interest rates are stochastic. Therefrom we deduce the convergence of option values in either complete or incomplete markets. We illustrate the general...

We consider a financial market with costs as in Kabanov and Last (1999). Given a utility function defined on ${\mathbb R}$, we analyze the problem of maximizing the expected utility of the liquidation value of terminal wealth diminished by some random claim. We prove that, under the Reasonable...