One of most challenging problems from applying the Black-Scholes model to financial derivatives, is reconciling the deviation between the expected and observed values. This study derives an extension of the Black-Scho...One of most challenging problems from applying the Black-Scholes model to financial derivatives, is reconciling the deviation between the expected and observed values. This study derives an extension of the Black-Scholes model and recovers the real drift of binary call options from their market prices. For space-dependent real drift, we obtain stable linearization and an integral equation. We also find that using market prices of options with different strike prices enables us to identify the term structure of the real drift. Results demonstrate that our new approach can confirm the existence of arbitrage opportunities in a binary option transaction.展开更多
文摘One of most challenging problems from applying the Black-Scholes model to financial derivatives, is reconciling the deviation between the expected and observed values. This study derives an extension of the Black-Scholes model and recovers the real drift of binary call options from their market prices. For space-dependent real drift, we obtain stable linearization and an integral equation. We also find that using market prices of options with different strike prices enables us to identify the term structure of the real drift. Results demonstrate that our new approach can confirm the existence of arbitrage opportunities in a binary option transaction.
