Arbitrage Pricing of Multi-person Game Contingent Claims

TL;DR

This paper extends the concept of two-person game options to multi-party financial contracts, establishing conditions for unique arbitrage pricing and additive valuation across contract partitions.

Contribution

It introduces a multi-party game option framework with broad decision-making, generalizes existing models, and provides conditions for arbitrage-free, unique pricing.

Findings

Unique arbitrage price exists under certain conditions.

Pricing is additive across contract partitions.

Framework accommodates multiple decision-makers.

Abstract

We introduce a class of financial contracts involving several parties by extending the notion of a two-person game option (see Kifer (2000)) to a contract in which an arbitrary number of parties is involved and each of them is allowed to make a wide array of decisions at any time, not restricted to simply `exercising the option'. The collection of decisions by all parties then determines the contract's settlement date as well as the terminal payoff for each party. We provide sufficient conditions under which a multi-person game option has a unique arbitrage price, which is additive with respect to any partition of the contract.