Pricing Derived Securities Under an Edgeworthian Process

The purpose of this paper is twofold. First, it introduces a new version of the Edgeworth process with trading activities centered around self- interested enterprising arbitragers; and second, it examines how the prices of the derived securities are determined under this process. We show that the proposed process is stable and the resulting equilibria are Pareto optimal. Pareto optimality notwithstanding, this process has the tendency to distribute the welfare gains resulting from the introduction of derived securities in favor of the arbitragers.