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Changes in risk and valuation of options: a unified approach to option pricing bounds

Research output: Working paper

Published
Publication date2012
Place of PublicationLancaster
PublisherLancaster University
Number of pages37
<mark>Original language</mark>English

Abstract

In this paper we first prove a theorem which reveals how changes in risk affect option values. The theorem can be used to solve most problems in the theory of option pricing bounds with restrictions on probability distributions or risk preferences, given the prices of the underlying stock and multiple observed options. We then present analytical solutions to such problems subject to four interesting classes of probability distributions and four important classes of risk preferences, respectively.