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Probability and Computational Finance Seminar
Sergio Pulido
Carnegie Mellon University
Title: Option pricing and hedging in currency markets modeled with strict local martingales

Abstract: Strict local martingales have been used recently to model exchange rates. In such models, put-call parity does not hold if one assumes minimal superreplicating costs as contingent claim prices. In this talk we will illustrate how put-call parity can be restored by changing the definition of a contingent claim price. More precisely, we will discuss a change of numeraire technique when the underlying is only a local martingale. In this case, 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 cost under both measures, then put-call parity holds. We will discuss properties of this new pricing operator. This talk is based on work in progress by Johannes Ruf, Peter Carr and Travis Fisher.

Date: Monday, November 21, 2011
Time: 5:00 pm
Location: Wean Hall 6423
Submitted by:  Dmitry Kramkov