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Student Number 90428013
Author Ten-Yi Wang(王婷儀)
Author's Email Address No Public.
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Department Finance
Year 2002
Semester 2
Degree Master
Type of Document Master's Thesis
Language English
Title Pricing option with price limit and illiquidity
Date of Defense 2003-06-03
Page Count 35
Keyword
  • finite difference
  • liquidity
  • price limit
  • Abstract Abstract
    In this paper we discuss the influence of price limits and illiquidity on option price.
    Since financial literatures have research the two factors separately, in other words, they
    only conside red price limit in underlying assets or illiquid market. Therefore, we
    attempt to find how the two factors influence option price in the same time, and use
    finite difference method to simulate option price. The result of simulation presents
    option price decreases as the restrictions grow when underlying market has price limits;
    option price increases as the liquidity reduces when underlying market has liquidity
    problem; option price increases as the liquidity reduces when option market has
    liquidity problem.
    Table of Content 1. Introduction............................................................................................................1
    2. The model................................................................................................................3
    2.1 Geometric Broownian motion with boundary.............................................4
    2.2 The adjusted Black -Scholes model with stock price limit and stock
    liquidity...................................................................................................................5
    2.3 A simple model for option market with liquidity and stock market with
    price limit ................................................................................................................9
    2.4 The adjusted Black-Scholes model with stock price limits and option
    liquidity................................................................................................................. 11
    3. Numerical Implementation ..................................................................................... 14
    3.1. Multi-day valuation ...................................................................................... 14
    3.2 Numerical implementation of the price limit model................................... 15
    3.3 Numerical implementation of the adjusted Black -Scholes model with stock
    price limit and stock liquidity............................................................................. 17
    3.4 Numerical implementation of the adjusted Black -Scholes model with stock
    price limits and option liquidity.......................................................................... 20
    4. Numerical Results.................................................................................................... 23
    4.1 The effect of price limit.................................................................................. 23
    4.2 The effect of stock liquidity ........................................................................... 23
    4.2 The effect of option liquidity......................................................................... 24
    5. Conclusion................................................................................................................ 25
    Reference ....................................................................................................................... 26
    Reference 26
    Reference
    1. 林佑陽, 2002, “考慮價性等級流動性之認購權證評價模型’, 銘傳大學金融研究
    所碩士論文.
    2. Ban Junhwa, Choi In Hyeong and Ku Hyejn, 2000, “Valuation of European options
    in the market with daily price limit”, Applied Mathematical Finance, 7, 61-74.
    3. Krakovsky, A. “Pricing Liquidity into Derivatives”. Risk December 1999, 65-67.
    4. Leland, H.E., 1985, “Option pricing and replication with transaction costs”, Journal
    of Finance, 40, 1283–301.
    5. Wilmott, P. and Dewynne, J. and Howison, S., 1993, “Option Pricing”, Oxford
    Financial Press.
    6. Chou Pin-Huang, 1997, “A Gibbs sampling approach to the estimation of linear
    regression models under daily price limits”, Pacific-Basin Finance Journal, 5, 39-62.
    7. Etling,C. and Miller, T.W.,Jr., 2000, “The relationship between Index option
    moneyness and relative liquidity”, Journal of Futures Markets, Vol20, NO.10, 971-981.
    8.Black,F., and M. Scholes., 1973,”The pricing of option and corporate liabilities.”,
    Journal of Political Economy, 81, NO.3, 637-659.
    9.Elyas Elyasiani, Shmuel Hauser, Beni Lauterbach, 2000,”Market Response to
    liquidity improvements: Evidence from Exchange listing”, The Financial Review, 41,
    1-14.
    10 Feller, W.,1971,”An introduction to probability theory and its applications”, 2nd ed.,
    John Wiley, New York.
    Advisor
  • Chuang-Chang Chang(張傳章)
  • Files
  • 90428013.pdf
  • approve in 1 year
    Date of Submission 2003-07-07

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