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Some New Results on When Extra Risk Strictly Increases an Option's Value

Authors

  • James Huang,

    Corresponding author
    • James Huang is with the Department of Accounting and Finance, Lancaster University, Lancaster, Lancashire, United Kingdom
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  • Deyuan Zhang

    1. Deyuan Zhang is with the School of International Business Administration, Shanghai University of Finance and Economics, Shanghai, China
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  • We are grateful to the editor and an anonymous referee for very helpful remarks that helped improve the study.

Correspondence author, Department of Accounting and Finance, Lancaster University, Lancaster, Lancashire LA1 4YX, United Kingdom. Tel: +(44) 1524 593633, Fax: +(44) 1524 847321, e-mail: James.huang@lancaster.ac.uk

Abstract

In this paper, we present some new results on when extra risk strictly increases an option's value. We give a necessary and sufficient condition for a mean-preserving spread to strictly increase an option's value. We also give a necessary and sufficient condition for a risk change to strictly increase the values of options with strike prices in an open interval while preserving the values of all other options. These two results significantly improve the results given by Rasmusen (2007) (When does extra risk strictly increase an option's value? Review of Financial Studies, 20, 1647–1667). © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:44–54, 2013

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