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SUMMARY:Option Replication and Valuation in Illiquid Markets - Ku\, H (Yor
 k University (Canada))
DTSTART:20141119T110000Z
DTEND:20141119T120000Z
UID:TALK56207@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:We first investigate replication of a contingent claim in disc
 rete time under liquidity risk. We model liquidity costs as a stochastic s
 upply curve with an underlying asset price depending on order flow. We use
  a partial differential equation to define a delta-hedging strategy and sh
 ow that the payoff of this discrete replicating strategy converges to the 
 payoff of the option. We then investigate the utility indifference pricing
  to option valuation for a large trader in the market. We consider trading
  actions in illiquid markets will incur liquidity costs\, but at the same 
 time\, the trader can have influence on the stock price evolution and gain
  benefits from the permanent price impact by choosing the optimal strategy
 . Thus\, the option price\, in some sense\, is determined by these two con
 tradicting phenomena.
LOCATION:Seminar Room 2\, Newton Institute Gatehouse
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