Actuarial Transform Pricing

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis article studies four transform pricing methods in the context of general equilibrium (GE) framework. The four methods, viz. the Esscher transform, indifference pricing, the Wang transform, and the standard deviation loading, are popular among actuarial literature and practice. The transform pricing methods offer a convenient solution to contingent claim pricing problem with the underlying risk exposure cannot be fully hedged. We show analytically that these four methods are similar and close to the GE approach if the utility has an exponential function, and the underlying distribution is Normal. When the payoff distribution is non-gaussian, prices produced by the four methods vary widely. Moreover, some transform methods may lead to prices that are not coherent, violating one or more of the following properties; additivity, homogeneity, scale invariance and monotonicity. We discuss the implications of our findings on incomplete market pricing. Ruban, O., Vitiello, Luiz and Poon, Ser-Huang (2010 We discuss the implications of our findings on incomplete market pricing. How to quote or cite this document

European Call Option Application in Incomplete Market-Analysis and Development

“…So in this study, call option price will be calculated with linear approximation so that the calculation of the European call option price almost resembles the situation in the market, where the model will be derived by the method of Esscher Transform. Esscher Transform is chosen because based on the conclusions of Ruban et al (2010) which states that the method of Esscher Transform is a method for calculating the price of an asset that has risk. Yao (2001) also states that the method of Esscher Transform provides an option price calculation model, which is efficient and consistent.…”