Essays on Derivatives Pricing in Incomplete Markets

This dissertation comprises four essays on the topic of derivatives pricing in incomplete markets, accompanied by an application of the proposed methods to so-called sandbox options. The first three essays take a theoretical perspective on the pricing of derivatives with embedded decisions and the associated aspect of dynamic hedging. Aiming to establish new methods for handling decisions embedded in derivative contracts that help to overcome the shortcomings of existing approaches, the first essay lays the foundation and derives a pricing principle for options with decisions, and the second essay extends this principle to the problem of realistic hedging and applies it to American options. The third essay addresses problems with many utility functions that are used to derive prices in incomplete markets; problems encountered during the work on the second essay. It reveals severe limitations to the practical applicability of two well-established parts of the pricing and hedging literature, namely 'utility indifference pricing' and so-called 'utility-based pricing'. The fourth essay takes an empirical perspective on the pricing of exchange-traded commodities (ETCs). It examines daily pricing data of 237 ETCs traded on the German market from 2006 to 2012 using different measures for price deviations and pricing efficiency. It is the first study to systematically explore the pricing efficiency of ETCs and its sample is unique in size and regional focus. It finds that, on average, ETCs trade at a premium over their fair price. Furthermore, nine hypotheses on factors that are expected to influence pricing efficiency are formulated and tested using regression analysis. Statistical evidence is found for seven of the nine hypotheses

The pricing efficiency of exchange-traded commodities

Exchange-traded commodities (ETCs) open the commodity markets to both private and institutional investors. This paper is the first to examine the pricing efficiency and potential determinants of price deviations of this new class of derivatives based on daily data of 237 ETCs traded on the German market from 2006 to 2012. Given the unique size of the sample, we employ the premium/discount analysis, quadratic and linear pricing methods, as well as regression models. We find that the ETCs incur, on average, price deviations in their daily trading and are more likely to trade at a premium from their net asset values than at a discount. In addition, we examine the influence of certain factors such as management fees, commodity sectors, issuers, spread, assets under management, investment strategies, replication and collateralization methods on quadratic and linear price deviations