Arbitrage hedging strategy and one more explanation of the volatility smile

Details Arbitrage hedging strategy and one more explanation of the volatility smile Arbitrage hedging strategy and one more explanation of the volatility smile

2011-02-27

arxiv.org/abs/1102.5525v1

Economy

Quantitative Finance

Pricing of Securities

9 pages, 4 figures

Scientific paper

We present an explicit hedging strategy, which enables to prove arbitrageness
of market incorporating at least two assets depending on the same random
factor. The implied Black-Scholes volatility, computed taking into account the
form of the graph of the option price, related to our strategy, demonstrates
the "skewness" inherent to the observational data.

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