Remarks on the Pricing of Contingent Claims Under Constraints

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)433-441
Journal / PublicationIEEE Transactions on Automatic Control
Volume49
Issue number3
Publication statusPublished - Mar 2004
Externally publishedYes

Abstract

The study of the pricing of contingent claims under constraints leads, in the case of stocks obeying lognormal distributions, to an interesting analytical result. Namely, the price satisfies the Black Scholes equation with a different initial condition. We give a mostly analytical treatment of this result, using the probabilistic interpretation of the Cauchy problem, with nonsmooth initial conditions.

Research Area(s)

  • Arbitrage opportunity, Contingent claims, Hedging price, Stochastic control, Wealth process