Statistically fair price for the European call options according to the discreet mean/variance model

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We consider a portfolio with call option and the corresponding underlying asset under the standard assumption that stock-market price represents a random variable with lognormal distribution. Minimizing the variance hedging risk of the portfolio on the date of maturity of the call option we find a fraction of the asset per unit call option. As a direct consequence we derive the statistically fair lookback call option price in explicit form. In contrast to the famous Black–Scholes theory, any portfolio cannot be regarded as  risk-free because no additional transactions are supposed to be conducted over the life of the contract, but the sequence of independent portfolios will reduce risk to zero asymptotically. This property is illustrated in the experimental section using a dataset of daily stock prices of 37 leading US-based companies for the period from April 2006 to January 2013.

Keywords: European call options, «mean–variance» model, time-series analysis
Citation in English: Nikulin V.N., Odintsova A.S. Statistically fair price for the European call options according to the discreet mean/variance model // Computer Research and Modeling, 2014, vol. 6, no. 5, pp. 861-874
Citation in English: Nikulin V.N., Odintsova A.S. Statistically fair price for the European call options according to the discreet mean/variance model // Computer Research and Modeling, 2014, vol. 6, no. 5, pp. 861-874
DOI: 10.20537/2076-7633-2014-6-5-861-874

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