Detroit, MI 48202
Speaker: Hussein Nasralah, Wayne State University
Title: On indifference pricing of contingent claims
Abstract: Asset pricing is an active research area in math finance concerned with determining the appropriate price of, say, a derivative security such as a contingent claim, where $T$ is the maturity date.
A fundamental assumption in mathematical models of financial markets is that of no arbitrage (i.e., no opportunity for a "free lunch"). In a complete market, in which every $T$-claim can be replicated by a portfolio of stocks and bonds, the no arbitrage assumption necessitates a unique price for the claim. On the other hand, in an incomplete market, not every $T$-claim can be perfectly hedged, and the no arbitrage assumption is not enough to specify a unique price. In this talk, we will discuss results stemming from one candidate for the price of an asset in the above incomplete setup: the utility indifference price. The discussion will take place in a binomial model so that the results can be understood intuitively.