Real-world options: smile and residual risk
arXiv:cond-mat/9509095
Abstract
We present a theory of option pricing and hedging, designed to address non-perfect arbitrage, market friction and the presence of `fat' tails. An implied volatility `smile' is predicted. We give precise estimates of the residual risk associated with optimal (but imperfect) hedging.
11 pages,Latex, 5 figures (appended as uuencoded compressed tar -file)