Toward A General Framework for Modelling Roll-Over Risk
Introduction
Option pricing theory has its origin in the seminal paper of Black & Scholes (1973) and an important insight contributed by Merton (1973) to a general probabilistic framework. These papers are rightly credited with both stimulating academic research and igniting the subsequent explosion in derivative trading. It is rare indeed for academic work to garner such an immediate impact. As however, a consequence of the complex dynamic of market evolution, various ad-hoc mathematical tools were developed, clouding the intuition for mechanisms in finance.
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