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Some New Results on When Extra Risk Strictly Increases an Option's Value
Author(s) -
Huang James,
Zhang Deyuan
Publication year - 2013
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21556
Subject(s) - value (mathematics) , interval (graph theory) , economics , option value , actuarial science , value at risk , binary option , asian option , mathematics , econometrics , mathematical economics , valuation of options , risk management , statistics , finance , microeconomics , combinatorics , incentive
In this paper, we present some new results on when extra risk strictly increases an option's value. We give a necessary and sufficient condition for a mean‐preserving spread to strictly increase an option's value. We also give a necessary and sufficient condition for a risk change to strictly increase the values of options with strike prices in an open interval while preserving the values of all other options. These two results significantly improve the results given by Rasmusen (2007) (When does extra risk strictly increase an option's value? Review of Financial Studies, 20, 1647–1667). © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:44–54, 2013