Hedging Options On Exploding Exchange Rates
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Thu, 27/10/2011 13:00 |
Johannes Ruf (OMI) |
Mathematical Finance Internal Seminar  |
DH 1st floor SR |
| : Recently strict local martingales have been used to model exchange rates. In such models, put-call parity does not hold if one assumes minimal superreplicating costs as contingent claim prices. I will illustrate how put-call parity can be restored by changing the definition of a contingent claim price. More precisely, I will discuss a change of numeraire technique when the underlying is only a local martingale. Then, the new measure is not necessarily equivalent to the old measure. If one now defines the price of a contingent claim as the minimal superreplicating costs under both measures, then put-call parity holds. I will discuss properties of this new pricing operator. To illustrate this techniques, I will discuss the class of "Quadratic Normal Volatility" models, which have drawn much attention in the financial industry due to their analytic tractability and flexibility. This talk is based on joint work with Peter Carr and Travis Fisher. | |||