Alternative Option Pricing and CVA

Abstract

The document IFRS 7 requires disclosure of information about the nature and extent of risks arising from trading those instruments. There are several significant drawbacks in derivative price modeling which relate to global regulations of the derivatives market. Here we present a unified approach which in stochastic market interprets option price as a random variable. Therefore spot price does not complete characteristic of the price in stochastic environment. Complete derivatives price includes the spot price as well as the value of market risk implied by the use of the spot price. This interpretation is similar to the notion of the random variable in Probability Theory in which an estimate of the random variable completely defined by its cumulative distribution function. If random variable is assigned to price and observations are interpreted as spot prices then correspondent cumulative distribution function is associated with buyer market risk. Therefore buyer market risk is the value of the chance that the spot price is higher than it is implied by market scenarios.