Read full paper at: http://www.scirp.org/journal/PaperInformation.aspx?PaperID=51561#.VG2WumfHRK0 Author(s) Truc Le Affiliation(s) Quantitative Analytics, Global Markets, ANZ Bank, Singapore City, Singapore . ABSTRACT We review the nature of some well-known phenomena such as volatility smiles, convexity adjustments and parallel derivative markets. We propose that the market is incomplete and postulate the existence of intrinsic risks in every contingent claim as a basis for understanding these phenomena. In a continuous time framework, we bring together the notion of intrinsic risk and the theory of change of measures to derive a probability measure, namely risk-subjective measure, for evaluating contingen...
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