Abstract
This paper presents the design and simulation of direct exchange mechanisms for pricing European options. It extends McAfee’s single-unit double auction to multi-unit format, and then applies it for pricing options through aggregating agent predictions of future asset prices. We will also propose the design of a combinatorial exchange for the simulation of agents using option trading strategies. We present several option trading strategies that are commonly used in real option markets to minimise the risk of future loss, and assume that agents can submit them as a combinatorial bid to the market maker. We provide simulation results for proposed mechanisms, and compare them with existing Black-Scholes model mostly used for option pricing. The simulation also tests the effect of supply and demand changes on option prices. It also takes into account agents with different implied volatility. We also observe how option prices are affected by the agents’ choices of option trading strategies.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Chicago Board of Trade, http://www.cmegroup.com/company/cbot.html.
- 2.
Eurex Group, http://www.eurexchange.com/exchange-en/.
References
Satterthwaite, M.A., Myerson, R.B.: Efficient mechanisms for biliteral trading. J. Econ. Theor. 28, 265–281 (1983)
Roughgarden, T.: Lectures on Combinatorial Auctions. Lecture Notes on Topics in Algorithmic Game Theory, Stanford (2008)
Myerson, R.: Optimal auction design. Mathematics of Operations Research 6(1), 5873 (1981)
Parsons, S., Rodriguez-Aguilar, J.A., Klein, M.: Auctions and bidding. ACM Comput. Surv. 43(2), 1–59 (2011). doi:10.1145/1883612.1883617
Shoham, Y., Crampton, P., Steinberg, R.: Combinatorial Auctions. MIT Press, Cambridge (2010)
Baqueiro Espinosa, O.: Agent Risk Management in Electronic Markets using Option Derivatives. PhD thesis, Department of Computer Science, University of Liverpool (2008)
Higham, D.: An Introduction to Financial Option Valuation: Mathematics, Stochastics and Computation. Cambridge University Press, Cambridge (2004)
Hull, J.C.: Options, Futures and Other Derivatives, 5th edn. Prentice Hall, Englewood cliffs (2001)
King, A.J., Streltchenko, O., Yesha, Y.: Using multi-agent simulation to understand trading dynamics of a derivatives market. Ann. Math. Artif. Intell. 44–3, 233–253 (2005)
Nisan, N.: Bidding languages for combinatorial auctions. In: Crampton, P., Shoham, Y., Steinberg, R. (eds.) Combinatorial Auctions. The MIT Press (2006)
DeMarzo, P., Kremer, I., Mansour, Y.: Online trading algorithms and robust option pricing. In: Proceedings of the 38th Annual ACM Symposium on Theory of Computing, pp. 477–486. ACM, New York (2006)
Berg, J.E., Forsythe, R., Nelson, F.D., Rietz, T.A.: Results from a dozen years of election futures markets research. In: Plott, C.A., Smith, V.L. (eds.) Handbook of Experimental Economic Results, vol. 1, pp. 742–751. Elsevier, Amsterdam (2008)
McAfee, R.P.: A dominant strategy double auction. J. Econ. Theor. 56, 434–450 (1992)
Shoham, Y., Leyton-Brown, K.: Multiagent Systems: Algorithmic, Game-Theoretic, and Logical Foundations. Cambridge University Press, Cambridge (2008)
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2015 Springer International Publishing Switzerland
About this paper
Cite this paper
Abdullaev, S., McBurney, P., Musial, K. (2015). Direct Exchange Mechanisms for Option Pricing. In: Bulling, N. (eds) Multi-Agent Systems. EUMAS 2014. Lecture Notes in Computer Science(), vol 8953. Springer, Cham. https://doi.org/10.1007/978-3-319-17130-2_18
Download citation
DOI: https://doi.org/10.1007/978-3-319-17130-2_18
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-17129-6
Online ISBN: 978-3-319-17130-2
eBook Packages: Computer ScienceComputer Science (R0)