Finance Option Spread Thesis

The trick is to adjust the terminal payoff function of the (knock-in) barrier security in such a way that the simple contingent claim with this payoff function has the same price as the barrier security.

The same authors also have a paper on complex barrier options and lookbacks.

Nowadays very liquid markets exist for "plain vanilla" options (put- and call-options) with a variety of characteristics (expirations and strike-prices).

In many cases such options are much more natural hedging instruments for "exotic" options.

There is a lot a papers by Paul Glasserman, Brodie & Glasserman, for instance. No such problems with the ingenious least-squares idea of Longstaff & Schwartz . It is possible to keep the thesis completely theoretical (i.e.

A "fundamental analysis" approach to finding abnormal returns ("good odds/bets") is given by Dixon and Coles.

The "official" reason is that betting markets are quite close to the idealized markets with uncertainty we usually analyze (eg.

there is a clear terminal at which the outcome is decided), so we may get valuable information about decisions under uncertainty. One very common feature (try a Google-search) in the analyses of betting markets is the so-called "favorite/longshot-bias". Or in other words: You get a higher rate of return from betting on favorites than on "longshots".

Well-definedness of the problem: Bensoussan (1984), Karatzas (1989), Myneni (1992).

Even in complete(ly) discrete models (as for instance I&F-teori) American securities usually aren't rigorously defined & analyzed (there's no need to because "it's obvious").

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  1. Because you have the opportunity to talk with your audience, you have a better chance of understanding what the problem is from their perspective and be able to make a better proposal that they will at least listen to. Document your sources accurately both in your text and in your bibliography.