November 2017
Beginner
784 pages
22h 31m
English
In Chapter 13, we have introduced the essential mathematical machinery required to price options. We have done so under the somewhat self-contradictory assumption of market completeness. The practical implication of market completeness is that we price derivatives under the condition that they are of no use, as they can be perfectly replicated, and that any risk can be hedged away. Needless to say, markets are not complete, as a consequence of the following reasons:
From a theoretical viewpoint, market incompleteness implies the existence of multiple probability measures compatible with no-arbitrage. From a practical ...