Standard derivative pricing theory is based on the assumption of the market for the underlying asset being infinitely elastic. We relax this hypothesis and study if and how a large agent whose trades move prices can replicate the payoff of a derivative contract. Our analysis extends a prior work...

Viewing binomial models as a discrete approximation of the respective continuous models, the interest focuses on the notions of convergence and especially "fast" convergence of prices. Though many authors were proposing new models, none of them could successfully explain better performance for...

In this paper we analyze in what way the demand generated by dynamic hedging strategies affects the equilibrium prices of the underlying asset. We derive an explicit expression for the transformation of market volatility under the impact of hedging. It turns out that market volatility increases...

Binomial models, which rebuild the continuous setup in the limit, serve for approximative valuation of options, especially where formulas cannot be derived mathematically. Even with the valuation of European call options distorting irregularities occur. For this case, sources of convergence...

We derive a unified model which gives closed form solutions for caps and floors written on interest rates as well as puts and calls written on zero-coupon bonds. The crucial assumption is that forward rates with a compounding period that matches the contract, which we want to price, is...

Suppose that (X(n)) is a finite adapted sequence of d-dimensional random variables defined on some filtered probability space ( Omega, F, ( Fn),P ) . We obtain conditions which are necessary and sufficient for the existence of a probability measure Q equivalent to P ( which we call an equivalent...

Let M(X) be a family of all equivalent local martingale measures for some locally bounded d-dimensional process X, and V be a positive process. Main result of the paper (Theorem 2.1) states that the process V is a supermartingale whatever Q in M(X), if and only if this process admits the...

Assuming constant interest rates Brennan and Schwartz (1976, 1979) obtained the rational insurance premium on an equity-linked insurance contract through the application of the theory of contingent claims pricing. Further considerations with deterministic interest rates have been discussed in...

Starting with observable annually compounded forward rates we derive a term structure model of interest rates. The model relies upon the assumption that a specific set of annually compounded forward rates is log-normally distributed. We derive solutions for interest rate caps and floors as well...

The extension of the Black-Scholes option pricing theory to the valuation of barrier options is reconsidered. Working in the binomial framework of CRR we show how various types of barrier options can be priced either by backward induction or by closed binomial formulas. We also consider...