We study arbitrage opportunities in diverse markets as introduced by R. Fernholz in [2]. By a change of measure technique we are able to generate a variety of diverse markets. The construction is based on an absolutely continuous but non-equivalent measure change which implies the existence of...

We propose an approach for pricing and hedging weather derivatives based on including forward looking information about the temperature available to the market. This is achieved by modeling temperature forecasts by a finite dimensional factor model. Temperature dynamics are then inferred in the...

A Margrabe or exchange option is an option to exchange one asset for another. In a general stochastic volatility framework, by taking the second asset as a numeraire, we derive pricing as well as second order approximative pricing formulae for Margrabe options. This can only be done under...

We outline a martingale duality method for determining the minimal entropy martingale measure in a general continuous semimartingale model, and provide the relevant verification results. This method is illustrated by a detailed case study of the Stein and Stein stochastic volatility model driven...