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Pricing under the Benchmark Approach

Published: June 19, 2025 | arXiv ID: 2506.16264v1

By: Eckhard Platen

Potential Business Impact:

Makes stock option prices fairer and cheaper.

The paper summarizes key results of the benchmark approach with a focus on the concept of benchmark-neutral pricing. It applies these results to the pricing of an extreme-maturity European put option on a well-diversified stock index. The growth optimal portfolio of the stocks is approximated by a well-diversified stock portfolio and modeled by a drifted time-transformed squared Bessel process of dimension four. It is shown that the benchmark-neutral price of a European put option is theoretically the minimal possible price and the respective risk-neutral put price turns out to be significantly more expensive.

Page Count
22 pages

Category
Quantitative Finance:
Mathematical Finance