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- Title
Arbitrage, Continuous Trading, and Margin Requirements.
- Authors
HEATH, DAVID C.; JARROW, ROBERT A.
- Abstract
This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of call options. In the context of the Black- Scholes economy, margin restrictions are shown to exclude continuous-trading arbitrage opportunities and, with two additional hypotheses, still to allow the Black-Scholes call model to apply. The Black-Scholes economy consists of a continuously traded stock with a price process that follows a geometric Brownian motion and a continuously traded bond with a price process that is deterministic.
- Subjects
MARGINS (Security trading); VALUATION; ARBITRAGE; STOCK prices; BOND prices; OPTIONS (Finance); WIENER processes; INVESTMENTS; ECONOMIC models; MARGIN requirements; MARGIN accounts; MARKET prices
- Publication
Journal of Finance (Wiley-Blackwell), 1987, Vol 42, Issue 5, p1129
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1987.tb04357.x