Abstract
This paper examines the effects that pricing errors in the underlying asset have on options prices, their Greeks, and their implied risk neutral densities. Pricing errors can be viewed as a random proportional transaction cost. When pricing errors are information-unrelated, options prices are unambiguously higher than the Black-Scholes case and increasing in the pricing error variance. Hedging volatility is higher and the optimal exercise price for American put options is decreased. The option implied risk-neutral density and option Greeks are materially affected, which leads to suboptimal risk management and hedging when pricing errors are not accounted for.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
