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Article
When Does Extra Risk Strictly Increase an Option’s Value?
Review of Financial Studies (2007)
  • Eric Bennett Rasmusen
Abstract
It is well known that risk increases the value of options. This paper makes that precise in a new way. The conventional theorem says that the value of an option does not fall if the underlying asset becomes riskier in the conventional sense of the mean-preserving spread. This paper uses two new definitions of “riskier” to show that the value of an option strictly increases (a) if the underlying asset becomes “pointwise riskier,” and (b) only if the underlying asset becomes “extremum riskier.”
Disciplines
Publication Date
September, 2007
Citation Information
Eric Bennett Rasmusen. "When Does Extra Risk Strictly Increase an Option’s Value?" Review of Financial Studies Vol. 20 Iss. 5 (2007)
Available at: http://works.bepress.com/rasmusen/68/