Standard derivative pricing theory is based on the assumption of the market for the underlying asset being infinitely elastic. We relax this hypothesis and study if and how a large agent whose trades move prices can replicate the payoff of a derivative contract. Our analysis extends a prior work...

Viewing binomial models as a discrete approximation of the respective continuous models, the interest focuses on the notions of convergence and especially "fast" convergence of prices. Though many authors were proposing new models, none of them could successfully explain better performance for...

It is well-known that Gaussian hedging strategies are robust in the sense that they always lead to a cost process of bounded variation and that a superhedge is possible if upper bounds on the volatility of the relevant processes are available, cf. El Karoui, Jeanblanc-Picque and Shreve (1998)...

The basic model of financial economics is the Samuelson model of geometric Brownian motion because of the celebrated Black-Scholes formula for pricing the call option. The assets volatility is a linear function of the asset value and the model garantees positive asset prices. In this paper it is...

The effect of model and parameter misspecification on the effectiveness of Gaussian hedging strategies for derivative financial instruments is analyzed, showing that Gaussian hedges in the `natural'' hedging instruments are particularly robust. This is true for all models that imply...

Starting with observable annually compounded forward rates we derive a term structure model of interest rates. The model relies upon the assumption that a specific set of annually compounded forward rates is log-normally distributed. We derive solutions for interest rate caps and floors as well...

The following paper focuses on the incompleteness arising from model misspecification combined with trading restrictions. While asset price dynamics are assumed to be continuous time processes, the hedging of contingent claims occurs in discrete time. The trading strategies under consideration...

We apply Geometric Arbitrage Theory to obtain results in mathematical finance for credit markets, which do not need stochastic differential geometry in their formulation. We obtain closed form equations involving default intensities and loss given defaults characterizing the...

I show that an important no-arbitrage consistent but costly collateral rental yield contributes to about two-thirds of the standard CIP violations. I measure this yield using two approaches applied to short- and long-term CIP horizons. First, I assume that the yield is observable and proxy it...

In this paper we examine the problem of partially hedging a given credit risk exposure. We derive hedges which satisfy certain optimality criteria: For a given investment into the hedge they minimize the remaining risk, or vice versa. This is motivated by the fact that it is a core business of...