Abstract
In some papers we remarked that derivation of the Black Scholes Equation (BSE) contains mathematical ambiguities. In particular, there are two problems which can be raised by accepting Black Scholes (BS) pricing concept. One is technical derivation of the BSE and the other the pricing definition of the option. In this paper, we show how the ambiguities in derivation of the BSE can be eliminated. We pay attention to use options as hedging instruments. We develop a new approach to option price based on market risk. We define random market price of the option for each market scenario. The option premium is interpreted as the settlement between profit-loss expectations.
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