Template-Type:ReDIF-Paper 1.0  
Title: The Pricing and Hedging of Options in Finitely Elastic Markets
Author-Name:Frey, Rüdiger
Classification-JEL:G13 
Keywords: market microstructure, feedback effects 
Abstract: Standard derivative pricing theory is based on the assumption of the market for the underlying asset being
	infinitely elastic. We relax this hypothesis and study if and how a large agent whose trades move prices can replicate
	the payoff of a derivative contract. Our analysis extends a prior work of Jarrow who has analyzed this question in a
	binomial setting to economies with continuous security trading. We characterize the solution to the hedge problem in
	terms of a nonlinear partial differential equation and provide results on existence and uniqueness of this equation.
	Simulations are used to compare the hedge ratio in our model to standard Black-Scholes strategies. Moreover, we
	discuss how standard option pricing theory can be extended to finitely elastic markets. 
Length: pages
Creation-Date: 1996-06
Revision-Date: 
Handle: RePEc:bon:bonsfb:372
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonsfb/bonsfb372.pdf
File-Format: application/pdf
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