option pricing in incomplete market

Discussion of Pricing, hedging and Trading Financial Instruments
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david
Posts: 22
Joined: Thu Apr 07, 2011 10:28 am

option pricing in incomplete market

Postby david » Sun Jun 09, 2013 6:35 pm

Hi Carol,

I was reading the section III.4.5.1 on stochastic volatility PDE.

Does the delta hedging form of no arbitrage argument still apply to option pricing, even in incomplete market? Since you still use PDE, i suppose it still does apply.
Then if it does, can we say that the option price is subject to arbitrage forces? And if it is subject to such forces, then why doest it have a unique price? You said that's because market is incomplete. Then if the market is incomplete, is the option still subject to arbitrage forces?

Hope you could clarify. I am a bit confused..

Many thanks

David

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