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Arbitrage, Continuous Trading, and Margin Requirements
Author(s) -
HEATH DAVID C.,
JARROW ROBERT A.
Publication year - 1987
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1987.tb04357.x
Subject(s) - arbitrage , geometric brownian motion , margin (machine learning) , valuation (finance) , risk arbitrage , economics , black–scholes model , index arbitrage , financial economics , econometrics , arbitrage pricing theory , finance , computer science , economy , service (business) , capital asset pricing model , diffusion process , volatility (finance) , machine learning
This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of call options. In the context of the Black‐Scholes economy, margin restrictions are shown to exclude continuous‐trading arbitrage opportunities and, with two additional hypotheses, still to allow the Black‐Scholes call model to apply. The Black‐Scholes economy consists of a continuously traded stock with a price process that follows a geometric Brownian motion and a continuously traded bond with a price process that is deterministic.