Open AccessStrategic Option Pricing
Author(s) -
Volker Bieta,
Удо Бролл,
Wilfried Siebe
Publication year - 2020
Publication title -
economics and business review/the poznań university of economics review
Language(s) - English
Resource type - Journals
eISSN - 2392-1641
pISSN - 1643-5877
DOI - 10.18559/ebr.2020.3.7
Subject(s) - binomial options pricing model , economics , arbitrage , risk neutral measure , valuation of options , asian option , nash equilibrium , rational pricing , asset (computer security) , portfolio , mathematical economics , microeconomics , expiration date , arbitrage pricing theory , capital asset pricing model , financial economics , computer science , chemistry , computer security , food science
In this paper an extension of the well-known binomial approach to option pricing is presented. The classical question is: What is the price of an option on the risky asset? The traditional answer is obtained with the help of a replicating portfolio by ruling out arbitrage. Instead a two-person game from the Nash equilibrium of which the option price can be derived is formulated. Consequently both the underlying asset’s price at expiration and the price of the option on this asset are endogenously determined. The option price derived this way turns out, however, to be identical to the classical no-arbitrage option price of the binomial model if the expiration-date prices of the underlying asset and the corresponding risk-neutral probability are properly adjusted according to the Nash equilibrium data of the game.