Actuarial Fairness of Options
This was a project of mine for a class in computational finance. I designed an approach to look at the actuarial fairness of the vanilla American call option. It’s not a fully developed project for a number of reasons, but it was a good start I think. Problems with the approach included identifying which price to use for analysis, and who wrote the option (sellers could have different payoffs). The data I had available to me could not tease out this level of granularity, so I was stuck working with what I had. Ostensibly, the option is an actuarially fair bet, at least according to my results.