Option Pricing On The Basis Of Information Asymmetry

This paper introduces how to obtain the option pricing formula under a circumstance of incomplete information,or say information asymmetry between a buyer and a seller.Then the pricing method we obtained is used into two kinds of useful options,in which we get the final option price at time tin each case.Financial mathematical knowledge such as partial differential equation,Brownian motion,hedge,risk-neutral probability,option pricing under complete market and so on is necessaryly needed.This paper is a meaningful exploration towards traditional Black-Scholes option pricing,method.The main features of this paper are as follows:First,it is on the basis of information asymmetry that we get the option pricing formula,and the hedging problem on the buyer part has been settled.It is more illuminating and more practical than the method we got on the assumption that information is complete.Second,we settle the problem of how to evaluate the volatility.Not only we find a good way to evaluate the total volatility,but also we give a smart method to respectively evaluate volatility produced by the already know information and by the unknown information.Third,after finishing the theoretical proof,we tend to put it into practice.We choose the stocks of the Bank of China as our underlying equity.We use two kinds of interest rates as our risk-free interest rates:the interest rate for current deposit and the overnight lending weighted rates.In each case,we simulate the Euro call option price at time zero which is based not only on the formula we already got but also on the formula with a bated volatility. When we see the striking price as a independent variable,the option price at time zero is a function of it.In the end,we illustrate the roles that the volatility,risk-free interest rate and the striking price play in the option pricing formula.Thus we can get of whole picture of it.