Utility-Based Derivative Pricing in Incomplete Markets

Abstract

In recent years various suggestions concerning contingent claimvaluation in incomplete markets have been made. We argue that some ofthem can be naturally interpreted in terms of neutral derivative, priceswhich occur if derivative demand and supply are balanced. Secondly, weintroduce the notion of consistent derivative pricing which is a way ofconstructing market models that are consistent with initially observedderivative quotations.