Option Pricing with an Exponential Effect Function

14 Pages Posted: 17 Apr 2004

See all articles by Mattias Jonsson

Mattias Jonsson

University of Michigan at Ann Arbor - Department of Mathematics

Jussi Keppo

National University of Singapore - NUS Business School

Xu Meng

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering

Date Written: March 24, 2004

Abstract

We consider option hedging and pricing for a large agent. The large agent affects the market's demand-supply equilibrium and, therefore, the market prices of financial instruments. By assuming a specific large agent's effect function for the underlying asset we derive the corresponding effect function for call options on that asset. As we show, the price of a call option in our model is the solution to a Black-Scholes partial differential equation with a modified terminal condition. Finally we estimate our model parameters from option market data and compare our model with other large agent models.

Suggested Citation

Jonsson, Mattias and Keppo, Jussi and Meng, Xu, Option Pricing with an Exponential Effect Function (March 24, 2004). Available at SSRN: https://ssrn.com/abstract=531802 or http://dx.doi.org/10.2139/ssrn.531802

Mattias Jonsson

University of Michigan at Ann Arbor - Department of Mathematics ( email )

2074 East Hall
530 Church Street
Ann Arbor, MI 48109-1043
United States

Jussi Keppo (Contact Author)

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Xu Meng

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering ( email )

1205 Beal Avenue
Ann Arbor, MI 48109
United States

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