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Arbitrage hedging strategy and one more explanation of the volatility smile

By Mikhail Martynov and Olga Rozanova

Abstract

We present an explicit hedging strategy, which enables to prove arbitrageness of market incorporating at least two assets depending on the same random factor. The implied Black-Scholes volatility, computed taking into account the form of the graph of the option price, related to our strategy, demonstrates the "skewness" inherent to the observational data.Comment: 9 pages, 4 figure

Topics: Quantitative Finance - Pricing of Securities, Mathematics - Analysis of PDEs, 91B24
Year: 2011
OAI identifier: oai:arXiv.org:1102.5525
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