A model for pricing an option with a fuzzy payoff

A model for pricing an option with a fuzzy payoff

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Article ID: iaor20062868
Country: Spain
Volume: 6
Issue: 1
Start Page Number: 49
End Page Number: 62
Publication Date: May 2001
Journal: Fuzzy Economic Review
Authors: ,
Keywords: economics
Abstract:

This paper sets up a one period model for pricing an option with a fuzzy payoff. The option is written on an underlying asset that has a fuzzy price at the end of the period, modelled by means of triangular fuzzy numbers. The pricing methodology used is the standard one for pricing derivatives, i.e. the so called risk neutral valuation. Combining the standard Binomial Option Pricing Model with a fuzzy representation of the option payoff offers some advantages. First it provides an intuitive way of looking at the future price of an asset. Second it includes the results of the Standard Binomial Model, allowing the market to have different levels of information.

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