Prof. Dr. Sebastian Ferrando

We illustrate by example the construction of one-dimensional models for option pricing based  on operational and observable features of a single class of investors and a risky asset. Market models are defined based on a class of investors characterized by how they operate on financial data leading to potential portfolio re-balances. Once observable variables are selected for modeling, necessary conditions constraining these variables and resulting from the operational setup are derived. Future uncertainty is then reflected in the construction of combinatorial trajectory spaces satisfying such constraints. In the absence of probability assumptions, a minmax methodology is available to price option contracts; numerical results are presented based on worst case estimation of parameters.