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Article

On effectiveness of Russian option market

Vladimir N. Pyrlik, Morozova M. M.

Russian option market (presented by the only segment of Russian Trading System called Futures and Options on RTS — FORTS) has yet a very short history and considered underdeveloped. Intuitively the market seems ineffective in the sense that option prices allow long running arbitrage with no demand reaction leading to price adjustment as could be expected. In this paper basing on risk-neutral pricing we propose a method to calculate options fair prices and show the degree of market effectiveness in the sense of whether the arbitrage opportunities tend to drive market to an arbitrage-free equilibrium or not. The dynamics of underlying assets log returns is described as infinitely divisible Levy processes and mean-correcting Monte-Carlo simulation of risk-neutral market trajectories is applied to calculate option fair prices. Results show systematical ineffectiveness of FORTS.Russian option market (presented by the only segment of Russian Trading System called Futures and Options on RTS — FORTS) has yet a very short history and considered underdeveloped. Intuitively the market seems ineffective in the sense that option prices allow long running arbitrage with no demand reaction leading to price adjustment as could be expected. In this paper basing on risk-neutral pricing we propose a method to calculate options fair prices and show the degree of market effectiveness in the sense of whether the arbitrage opportunities tend to drive market to an arbitrage-free equilibrium or not. The dynamics of underlying assets log returns is described as infinitely divisible Levy processes and mean-correcting Monte-Carlo simulation of risk-neutral market trajectories is applied to calculate option fair prices. Results show systematical ineffectiveness of FORTS.