Options as Optimizations: A Dual Approach to Derivatives Pricing by Peter Carr

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Presenter: Peter Carr, Managing Director, MORGAN STANLEY

Options as Optimizations: A Dual Approach to Derivatives Pricing 

Outline:

In most but not all valuation models contingent claims with convex payoffs lead to convex value functions. In such models, convex duality can be used to represent values as optimizations. This approach leads to enhanced understanding of option greeks, dual PDE’s with computational advantages, and to a dual approach to derivatives pricing. In the dual approach, the modeler supplies an arbitrage-free process for delta, and derives arbitrage free dynamics for the value of the derivative and its underlying.

Published date

Monday, 10 November, 2014