computational exploration of the biological basis of black-scholes expected utility function计算生物学基础的探索布莱克-斯科尔斯期望效用函数.pdfVIP

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computational exploration of the biological basis of black-scholes expected utility function计算生物学基础的探索布莱克-斯科尔斯期望效用函数.pdf

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computational exploration of the biological basis of black-scholes expected utility function计算生物学基础的探索布莱克-斯科尔斯期望效用函数

Hindawi Publishing Corporation Journal of Applied Mathematics and Decision Sciences Volume 2007, Article ID 39460, 15 pages doi:10.1155/2007/39460 Research Article Computational Exploration of the Biological Basis of Black-Scholes Expected Utility Function Sukanto Bhattacharya and Kuldeep Kumar Received 28 April 2006; Revised 19 October 2006; Accepted 14 November 2006 Recommended by Mahyar A. Amouzegar It has often been argued that there exists an underlying biological basis of utility func- tions. Taking this line of argument a step further in this paper, we have aimed to com- putationally demonstrate the biological basis of the Black-Scholes functional form as ap- plied to classical option pricing and hedging theory. The evolutionary optimality of the classical Black-Scholes function has been computationally established by means of a hap- loid genetic algorithm model. The objective was to minimize the dynamic hedging error for a portfolio of assets that is built to replicate the payoﬀ from a European multi-asset option. The functional form that is seen to evolve over successive generations which best attains this optimization objective is the classical Black-Scholes function extended to a multiasset scenario. Copyright © 2007 S. Bhattacharya and K. Kumar. This is an open access article distrib- uted under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. 1. Option basics An option provides the holder with the right to buy or sell a speciﬁed quantity of an underlying asset at a ﬁxed price (called a strike price or an exercise price) at or before the expiration date of the option. Since it is a right and not an obligation, the holder can choose not to exercise the right and allow the option to expire. There are two basic types of options—call options (right to buy) and put options (right to sell). A call option gives the